THE UNICORN EFFECT

Yelp is having a really tough time competing for salespeople

Yelp shares are taking a beating today (July 29) after the company reported disappointing second-quarter revenue and a gloomier outlook for the remainder of the year. The stock opened at $24.94, a 25% fall from its closing price yesterday.

The San Francisco company is currently plagued by a number of problems: Local ad revenue is slowing; the reviews site is having trouble attracting users outside the US; rising costs are eating away at margins; and last but not least, hiring is hard.

It’s no secret that Silicon Valley companies are having a tough time finding talent, but they usually complain about the dearth of engineers on the job market. For Yelp, growth is stalled by its inability to hire as many sales representatives as it’d like. Yelp intended to increase its salesforce by 40% in 2015, but given the current environment, it revised that figure to 30%.

RBC Capital Markets believes this is a direct effect of rising valuations, in particular the increasing number of billion-dollar startups, colloquially known as unicorns. In the second quarter, a record 24 startups eclipsed the $1 billion valuation mark, more than double the quarter before. Salespeople, and workers in general, are eager to join such hot companies in hopes of scoring a piece of equity. In a research note sent out today, the firm noted that Yelp is particularly vulnerable:

[T]he Unicorn Bubble is causing aggressively rising workforce/compensation challenges. Perhaps especially for public companies in the Bay area with stagnant stock prices. Which is Yelp.

Yelp’s chief operating officer, Geoff Donaker, admitted that hot startups are making it hard to hire, but said the company’s “trying to maintain a high quality bar on hiring and retention and promoting within.”

The company’s also trying to mitigate the effects by opening offices in less competitive markets, most recently in Chicago. “Now that we’ve got four domestic offices [including New York and Phoenix] that we’re able to hire into, it helps to offset specifically high competition in any one offices as we’re seeing right now in San Francisco,” he said.

What’s the saying? If you can’t handle the heat, get out of the kitchen.

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