Hot opportunity: Startups focused on local

Scale Venture Partners Sharon Wienbar on why local businesses are worth investing in

Whether Google buys Yelp for more than half a billion is still an uncertainty. But one thing is for certain, Yelp, the local business review site that launched in 2004, is in the spotlight, begging the question: What's so hot about local now? Over the years I've covered the Internet, businesses focusing on local seem to go in and out of favor.

Next year may very well be the year startups focused on local may get some increased attention, if for only the fact that Yelp is creating buzz around local opportunities. Let's hope for a big Yelp exit, and a successful IPO for ReachLocal, a service that helps small businesses acquire new customers online, which recently filed its S-1.

Sharon Wienbar, VC partner at Scale Venture Partners, is an expert on the local market. Scale has investments in three startups positioned to capitalize on the small business and local market opportunities. They include MerchantCircle, Reply and Hubspot. 

In this segment of our three-part interview series, Sharon talks about why she thinks Google is so hot and heavy over Yelp and other opportunities in the local market. This is great news for the many companies emerging in the local space. Thumbtack, notable because it was the overall winner in the JuicePitcher competition in October, is a startup that helps consumers find local services and transact online. Redbeacon is a similar company and notable for winning the TC50 award a few months earlier. Both Thumbtack and Redbeacon are competing in Vator's Splash competition. 

Here are some highlights:

- Sharon talks about how large and yet untapped the local advertising market is online. ReachLocal's S-1 cites Borrell Associates, small- and medium-sized businesses spent $60.5 billion in local advertising in the U.S. in 2008. 

- Google likely wants to buy Yelp because 25% of searches are for local services. Google makes money by selling sponsored links for those searches. But it doesn't make any money off the organic search results. Essentially, Google wants to improve the returns on the clicks off the search results it displays. In other words, by owning Yelp, Google could start monetizing the organic searches as it drives consumers to its own property.

- Google could better service local businesses by combining the services Yelp offers. 

- Yelp has a lot of unique content about local businesses that other companies don't have, creating a valuable library of content.

- Many companies are still using the feet-on-the-street model of acquiring new customers. ReachLocal has nearly 500 sales reps. Acquiring new customers can be costly - $200 to $2000 per customer. In the old days, this cost could be justified when a local customer would buy an add in the Yellow Pages for $2000 per month. But today, those costs need to come down.

- Opportunities around local businesses include:

Services that help businesses manage their marketing/advertising budgets

Services that change the sales strategy for how to get small businesses to buy services