Yodle: How A Startup Went From Birth To Buyout by [email protected]
Yodle, a company co-founded by two Penn undergraduates and a Wharton professor, has just been bought by Web.com, a provider of Internet services for small businesses, for close to $350 million in cash. There are several key lessons from the Yodle experience, according to Kartik Hosanagar, Wharton professor of operations, information and decisions, and Nathaniel Stevens, founder and Chairman of Punchey, a payment platform for small businesses. In this opinion piece, Hosanagar and Stevens note that among those lessons, the Yodle story shows “the value of bootstrapping a startup and validating the business plan with customers first, and with investors later.”
Yodle is a provider of local online advertising and marketing services. Its roots were planted in the summer of 2004 when Nathaniel Stevens, an undergrad at Wharton, spent his summer working at his dad’s car dealership in New Haven, Connecticut. That was still the Yellow Pages era of local advertising, and Yodle was one of the first to fully realize the potential of the web in connecting local businesses with local customers.
At the time, consumers were using Google in growing numbers to find local services. If you lived in Philly and wanted a dentist, you simply Googled “Philadelphia dentist.” Yet while consumers had taken to the web in pursuit of their product or service options, local businesses had not. From a marketing standpoint, they were stuck in a static, fat yellow book. Sensing an opportunity, Yodle took its cue from changing consumer behavior — and offered local businesses a way to reach consumers on the web.
The archetypal local business is a mom-and-pop affair: It’s not tech savvy, and doesn’t have a large marketing team that researches customer behavior. Stevens discovered the enormous untapped potential that the web offered for local businesses. He was able to place ads for his dad’s dealership for search queries such as “Connecticut car dealer” and secure promising leads online through Google and Yahoo’s search ad auctions.
With access to a free eMarketer subscription courtesy of Penn’s Lippincott Library, Steven’s suspicion was confirmed: It seemed inevitable that the $20 billion local advertising market — then dominated by Yellow Pages and local print ads — would be replaced by online models over the next five to 10 years. Stevens spent the last six weeks of that summer building out a business plan around the idea. Upon returning to Wharton in the fall, the plan helped him get accepted into Wharton’s Venture Initiation Program (VIP).
“The archetypal local business is … not tech savvy, and doesn’t have a large marketing team that researches customer behavior.”
After building a functional prototype and signing initial beta customers in Center City Philadelphia, Stevens recruited a childhood friend, Ben Rubenstein, to help with sales. The decision to recruit Rubenstein — a fellow Penn undergrad — as a co-founder was based largely on an earlier high school experience where the duo once scalped 100 Backstreet Boys tickets to hordes of teenage girls in New Haven. With six weeks left until Labor Day (the self imposed “do or die” date), the company had one goal: $20,000 a month in recurring, break-even revenue — or go bust. By Labor Day 2005, the company was producing $22,500 in monthly revenue, enough to pay suppliers, a few salaries and sustain a business.
Yodle – From Services to Marketing
To support an influx of customers, Stevens and Rubenstein knew they would need to reduce the amount of ‘touch and service’ required by each account. In Fall 2005, Kartik Hosanagar, a Wharton professor, joined as a co-founder, with the goal of transforming Yodle from a services company into a marketing platform.
Stevens was looking for someone to help on Yodle’s product side, and posted a notice on a discussion group. Hosanagar’s wife, then an MBA student at Wharton, was interested in product-related work, and responded. After a conversation with Stevens, she concluded that her husband would be a better fit for Yodle’s needs. Hosanagar had previously devised algorithms that could automatically identify the right Google-search keywords for any business, and then figure out how much to bid on those keywords in auction.
The bidding aspect was crucial, because Google runs real-time auctions 24/7, and to truly make use of the format, a business needs to be able to analyze the data in real time, too, and adjust its bids accordingly. The application of Hosanagar’s technology would help transform Yodle into a scalable technology platform — and transform Yodle from a vendor of unwieldy, bespoke “services” to a vendor of a replicable “product.”
Local businesses responded well to Yodle’s offering. Its very first client was Snyder Optical on Pine Street, in Center City Philadelphia. Yodle’s clients derived value from the platform in many ways that the founders had not even anticipated. For example, Yodle had a feature that allowed it to track every lead and phone call that it generated for its local business client. A local salon owner revealed that he had logged in to verify the quality of Yodle’s leads and listened instead to a call in which his receptionist had just turned away a highly profitable bridal party because “their books didn’t go out that far.”
“Although local businesses were quick to see Yodle’s value, investors initially shied away from the startup.”
He realized, then, that it was time to invest in an appointment book — and to double down on Yodle.
Although local businesses were quick to see Yodle’s value, investors initially shied away from the startup. “This is at best a lifestyle business,” one investor said — as opposed to a ‘venture-fundable’ one. He, like other investors, believed that Yodle’s ambitions exceeded its potential. Many suggested that it would be hard to replicate Yodle’s early Philadelphia success in other markets; or that, if it were replicable, it would take an inordinate amount of time and money.
The founders decided to start selling in another market to prove the skeptics wrong. By March 2006, Yodle had nearly 100 customers in Philadelphia and Washington, D.C. — a market headed up by John Berkowitz, another childhood friend of Stevens and Rubenstein who joined the founding team — and a revenue rate of more than $500,000 a year. They decided to resume their fundraising efforts, and pitched Yodle’s growth story and the vision of creating a “CMO-in-a-box” marketing platform for all local businesses.
Unfortunately, fundraising wasn’t any easier this time, either. Investors — on the East Coast at least — weren’t willing to invest in a founding team consisting of college students with no work experience and a professor. So Yodle roped in a friend of Hosanagar, Milind Mehere, to round out the founding team and help with fundraising efforts. Mehere, who was a director of sales engineering at a Boston-based startup, held many key roles over time on Yodle’s management team.
Yodle eventually raised its Series A financing in October 2006. It was rejected by close to 50 VC firms, which may seem like a large number to outsiders, but is par for the startup-course. Few beginner entrepreneurs understand how much ownership dilution occurs during a major financing event. Yodle’s first term sheet was from an investor who wanted to take 50% of the company for its