$55 Million VC Funding for Local Search Company

October 9, 2007 Los Angeles Times: "Web companies eye market for local ads"

SAN FRANCISCO -- When it comes to finding local products and services, consumers are increasingly letting their fingers do the clicking.

Locally targeted search engines have replaced thick phone books as the starting point for millions of people seeking plumbers, personal injury lawyers or hair stylists. That trend is creating a big business opportunity for a slew of online players, including advertising start-ups, Internet giants and traditional yellow-pages publishers.

One Woodland Hills company, ReachLocal Inc., just landed $55.2 million in venture funding to bulk up as it tackles the local-search market.

Welcome to the next big front in the battle for online advertising dollars. Kelsey Group, a research firm based in Princeton, N.J., predicts that local search and Internet yellow-pages ad spending will grow to $4.9 billion in 2011 from $1.9 billion this year.

"It's a huge growth opportunity," said Warren Kay, Yahoo Inc.'s managing director of strategic alliances. "We are very interested in small businesses. They provide meaningful content consumers are looking for."

Search engines are investing in initiatives to create virtual neighborhoods where people can find detailed information on local businesses, including consumer reviews and such basics as the hours of operation.

Google Inc., for example, recently launched a pilot program to send contractors into local businesses to collect such information. ReachLocal is using some of the money it raised to take a similar approach, sending salespeople into small businesses across the country to offer to manage their search-engine advertising campaigns.

Those "feet on the street" efforts reflect how hard it is to reach the country's millions of small-business proprietors, who tend to rely on more traditional forms of advertising, and teach them about the benefits of online search, analysts say.

To wit: Businesses with fewer than 100 employees spent less than 5% of the nearly $72 billion spent on all forms of advertising in the U.S. in 2006, according to Borrell Associates Inc., a media research and consulting firm in Williamsburg, Va.

Companies such as ReachLocal, Irvine-based WebVisible Inc. and New York-based Yodle Inc. -- as well as the digital arms of huge directory publishers such as AT&T Inc. and R.H. Donnelley Corp. -- are preaching that the Internet can be the great equalizer for small merchants struggling to get noticed. They tout simple text ads alongside search results as one of the most effective strategies to land new customers.

Advertisers like search ads because they're highly targeted and shown to people who are actively looking to buy a particular product or service.

Major advertisers have seen the upside for some time and are increasing their spending on search ads. Revenue from search advertising in the first half of 2007 jumped nearly a third to $4.1 billion, representing 41% of all online ad spending, the Interactive Advertising Bureau said.

But because mounting an effective search marketing campaign is complicated, most small businesses have yet to experiment with it.

Some small businesses have mastered the science of rising to the top of search results without having to buy keywords by tweaking their websites and getting prominent ones to link to them. Others buy their own search-engine ads, but analysts say most either don't know how or can't spare the time.

That's where ReachLocal and its competitors come in. The services vary, but essentially small businesses hire these companies to buy keyword ads on major search engines such as those of Google, Yahoo and Microsoft Corp. Some companies track the results for their clients through e-mails or phone calls. Now many of these companies are developing video and mobile technologies. And they are finding success.

Take Eddie Ugalde, 33, who runs an eco-friendly carpet cleaning business in Altadena. He started spending $1,000 a month with ReachLocal in March and got such a dramatic response from the search campaign that he moved Right Away Carpet Drycleaning out of his home, grew from two employees to 10 and bought a distribution business. He recently increased his monthly ad purchase to $1,500.

"It would have taken a real long time for word of mouth to give us the opportunity to be in the place we are today," Ugalde said.

To reach this largely untapped online market, the old-fashioned yellow-pages publishers have an edge because they already have relationships with small businesses around the country, said Matt Booth, a Kelsey Group senior vice president.

After a few fits and starts, these publishers increasingly are marketing search advertising to mom-and-pop operations.

"As online takes off, small businesses know that they need and want to be there," said Matt Crowley, chief marketing officer for AT&T subsidiary Yellowpages.com.

My Take
$55 Million? To pay commissions to sales reps? They must be very confident in their "feet on the street" approach. 'Sounds like a lot of overhead to me.

What about the existing, powerful network that already exists in every city and town? Happy customers are already spreading the good word about their trusted local businesses in grocery stores aisles, at school concerts and on the sideline of football and soccer games every day.

Why not leverage these relationships? Why leave them out of the equation?

Tags: localsearch

Tuesday October 9, 2007 - 04:50pm (EDT)