ReachLocal Grabs Huge Round for Local Sales

ReachLocal reportedly just got a mind-boggling $55 million from Rho Ventures, Galleon Crossover Fund and VantagePoint Venture Partners (haven’t seen a release however), bringing its total investment to nearly $70 million. This is dramatic but it makes the end game for the company a bit foggier in my view.

ReachLocal was one of the first and certainly is one of the most prominent SEM firms for SMBs. However, unlike other, smaller firms in the segment that have been bought, it has not. Now it has a staggering valuation ($300+ million according to TechCrunch) that almost certainly precludes any kind of near-term acquisition. That said, Reach is successful and has meaningful and growing revenues (I’ve heard various estimates, but many millions of dollars).

The company has clearly decided to go, pardon the expression, “balls out” and build a sales force on a national basis. It has been opening local offices over the past year but this funding will dramatically accelerate the process. I suspect we’ll also see some advertising – maybe even TV/video ads – as a result of the funding. There’s an opportunity to create a ‘brand” here because, despite there being at least a dozen companies in the same segment SMBs are largely ignorant of who these companies are. Most are also working with sales channel partners on a “white label” basis as well.

But since Reach is reaching out directly to SMBs, there is a opportunity to do some national advertising in both print and online media and build awareness among SMBs that Reach is an “onramp” for them to online advertising.

Building a local sales force was part of ReachLocal’s original plan when it launched. But my sense is that the plan was initially shelved as being too challenging. Training was an issue; the quality of people was an issue. But after failing to land any tier-1 yellow pages partnerships (there were CMR partnerships) the company set sail on a course to become independent. This latest round is the result of that independent course.

Essentially the company is building a yellow-pages style sales force without the directory publication (Weblistic and Yodle are attempting something similar). It’s an audacious but possible enterprise. At this point in time, a sales force (premise and/or telephone) is necessary to truly tap the SMB potential for local Internet advertising. However, the argument goes, the yellow pages sales force has various “conflicts of interest” – chiefly financial allegiance to the printed product. There’s also the contention that as print usage continues to decline over time, that product will be harder to sell (even as part of a bundle) to SMBs who will just want electronic distribution.

These arguments, which have been made to me, may or may not actually come to pass. But there’s clearly an SMB appetite for Internet distribution and a need for someone to educate and help SMBs get from where they are to the various consumer points of entry on the Internet. The yellow pages (and others) are doing this, but only for a minority segment of the potential market.

Google, Yahoo! and, to a lesser degree, Microsoft are the indirect beneficiaries of these programs because that’s where the traffic mostly comes from. So while Google is dipping its toe in the water of local sales with its local business referral program, Reach and others are building professional sales forces that will send SMB revenue to Google, et al. This model is the fruit of “infrastructure” that began in 2004 with companies such as Marchex and BellSouth (now part of AT&T) and SME Global Solutions (now WebVisible) and has grown over time. All the major yellow pages, webhosting firms, some verticals and a growing number of newspapers offer a suite of Internet marketing services powered by these firms (WebVisible, Marchex, et al).

Yahoo! has an opportunity with its newspaper consortium to leverage the local market presence and sales force of its newspaper partners. We’ll see if it can effectively do that.

Occasionally I still get the question from journalists and others about whether Google or Yahoo! will “buy a yellow pages company.” The answer is always no because it would be inefficient to take on all the overhead and there’s no cultural fit. But Google, Yahoo and Microsoft have to buy a yellow pages company because they own the distribution that everyone is feeding into.

One question will be, as Reach and its competitors grow and proliferate, whether the traditional yellow pages can hang on to their advertisers in the face of growing and potentially lower-priced competition. But the yellow pages are also familiar to SMBs and trusted to varying degrees. As one person said to me, “there’s a lot of noise in the channel.” SMBs have increasing numbers of companies offering marketing services to them, which makes for more choice but also more confusion. That confusion often translates into “inertia,” which benefits the yellow pages.

This is why I say that there’s an opportunity to establish a “brand” here. If there’s a trusted alternative source for Internet marketing, many SMBs will willingly sign up. But that’s still “a ways off,” as they say.

The drama that the media and some in the industry like to follow is: yellow pages vs. new media (e.g., Google). But recognize that the yellow pages publishers “own” only about a 1/3 or so (3-3.2 million) of the “addressable” market. This is ultimately a very big opportunity. If there are roughly 20 million SMBs “on paper,” about half of that number is willing to spend any money on advertising, ranging from $600 per year to several hundred thousand.

Google has fewer than 1 million advertisers, off of whom it will likely make more than $12 billion this year. The yellow pages industry in the US is worth just over $14 billion.

There are roughly seven million SMBs out there in the “addressable market” that are not yellow pages advertisers and could be served by Internet marketing to varying degrees. And in the entire market if there are a million US SMBs that are willing to spend $1,000 per month (or $12K per year) that’s $12 billion in potential revenues that have yet to be tapped.

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Attention VCs and private equity firms: there’s a “roll up” opportunity to take a bunch of these companies (there are more now) and build something larger, such as Reach is trying to build organically.