When Jeremy Stoppelman was applying to Harvard Business School in 2003, he asked his boss at PayPal, Elon Musk, to write him a letter of recommendation.
"I don't think Jeremy needs to go to Harvard," Musk recalls typing. "I just want to make that clear. My personal recommendation is that he doesn't go." Stoppelman got in and attended anyway, only to drop out a year later so he could start Yelp, a user-driven business-review service, with his friend Russ Simmons.
Since then Yelp (yelp) has grown into a multi-national publicly traded company with 1,700 employees and a market cap of $4 billion. Twice Stoppelman has rejected offers to buy Yelp, first for a reported $500 million, from Google (goog), then for $1 billion from Yahoo (yhoo). In July the San Francisco-based company bought SeatMe, a reservations service that competes with the likes of OpenTable (open), for $12.5 million. Second-quarter 2013 revenue of $55 million exceeded expectations. Traffic is at an all-time high, up 75%, year over year outside the U.S. The library of Yelp reviews now stands at 42.5 million, and the site has 108 million monthly uniques -- more people than ever in over 120 cities visit Yelp to find the best dim sum, dry cleaner, dermatologist, or dog park.
Despite a robust user base, an international footprint, and an aggressive push into advertising sales, Yelp, like so many other Internet darlings, has yet to turn a profit. It's a bit of a trope: a young, ambitious founder-CEO (Stoppelman is 35 and No. 16 on our 40 Under 40 list) who has taken the long view against critics clamoring for a quicker path to profitability. But that's exactly who Stoppelman is, and that's the lengthy course he has set for his company.
Much of Yelp's success is due to its users -- the website is only as valuable as its content, and it has content only if people actively participate. As such, when Yelp opens in a new market abroad, it does so by hiring "scouts" to build up a library of reviews, then adding community managers to spread the word. The maneuver is not cheap, although it has earned Yelp kudos as one of the first web companies to expand city-by-city, via on-the-ground efforts -- now the norm for many other convenience startups such as Uber and Airbnb. Yelp launched in Brazil, New Zealand, and the Czech Republic this year, and Stoppelman says Yelp could be profitable "if we did reduce our investment in the business." The second thorn is even thornier: getting small businesses to advertise on Yelp. Small businesses invest $2 billion a year in the YP Real Yellow Pages, and the company's digital-advertising business had seven times Yelp's revenue in 2012. Yelp needs to bite into that pie, and to do so, it's aggressively ramping up its ad-sales staff, which currently includes about half of all Yelp staffers. Right now only 51,400 small businesses advertise with Yelp, out of some 20 million in the U.S.
There is, however, some controversy surrounding just how Yelp earns new customers. Do its search results favor businesses that pay to advertise? Might it punish those that decline? Yelp's review filter, which is meant to weed out artificial reviews both positive (such as a friend giving another friend's business five stars) and negative (competitors slamming one another), has drawn much of the ire. During a Yelp "town hall" in Hollywood in August, a number of people stood to complain that after they declined to advertise, their best reviews disappeared. Stoppelman insists unequivocally that advertising has nothing to do with the review filter. "Salespeople have no ability to do anything with reviews -- never have, never will," he says. Some sales reps at Yelp suggest that would-be customers often learn about Yelp during a sales call and decline to advertise, but then solicit friends to quickly write five-star reviews. The system then spots those reviews and filters them out.
Yelp's challenge is to prove to businesses they can get more from the company if they pay for its services than they can by using it for free. This summer Yelp launched Yelp Platform, which allows users to order food directly from the website or app. As a result, Yelp can fish for new business by sharing these "leads," such as how many people called a restaurant, clicked its website, or looked up directions from within Yelp's listing. Yelp Platform is the first significant e-commerce offering from Yelp. As Jefferies analyst Brian Fitzgerald says, "Not only do you cull the reviews, but you help that business book tables -- you help it get customers. There's a whole suite of products there that could be integrated. It could unseat OpenTable." And yet, what is free on Yelp is still what is most compelling. About 1.2 million business owners (far more than the 51,400 that pay) are utilizing Yelp's suite of free tools, which they can access by "claiming" their owner page at biz.yelp.com. Rakesh Agrawal, an analyst at ReDesign Mobile, says utilizing Yelp's free tools "is one of the best things you can do for your small business," but he's less impressed with its advertising services (he has shorted the stock): "The thing I highly recommend for businesses is, instead of giving your money to Yelp, give your time." Stoppelman's goal is to build a product so compelling that they will do both.
Stoppelman is sitting in on a product meeting in Levchin's, the conference room named after Max Levchin, the PayPal co-founder who gave Yelp an early $1 million investment. Stoppelman is dressed in J. Crew, head to toe. (He's friends with the retailer's CEO, Mickey Drexler, who persuaded Stoppelman to come in for a full fitting when he was in New York.) In today's meeting he and a few engineers are considering the look of a screen on Yelp's mobile app, one that shows up after customers check in somewhere. One engineer shows a possible response after a user visits a store and answers a question about the experience. "Dolla dolla bills, y'all! That was fun. Let's try another," reads the screen. Stoppelman says, "Can we do a ... sound effect? Like, obviously, we could have 'Cha-ching!' " The group laughs.
Stoppelman isn't the most gregarious guy -- "It's not my first thought to go out and meet people," he says. He is quiet, reserved, and prone to pick up new hobbies with scholarly single-mindedness. He taught himself guitar by watching videos online. But around the office he loosens up. Miriam Warren, vice president of new markets, says that over time, "I've seen him get more comfortable in his own skin." He sends out weekly videos to the entire staff (called the "Stoppelblog") to give short company updates. Stoppelman's younger brother, Michael, Yelp's VP of engineering, is the opposite: chatty, animated. Around the office they call him "M-Stop." Jeremy has no nickname.
And yet in a business setting, he has always been anything but shy. At PayPal he was unafraid to speak out, and it's something he encourages Yelp employees to do regardless of rank. Perhaps it is a residual from being surrounded by extremely competitive, ambitious leaders like Musk, Thiel, and Levchin when he was just a young engineer not long out of the University of Illinois. "The way he moved up the ladder at PayPal," Levchin says, "was that he was very self-assured, which is pretty impressive for someone in his early twenties." Once, Stoppelman sent an angry email around, critiquing a new feature. "He clearly thought that he was being brash or sort of 'telling the man,'" Levchin says, "and a whole bunch of us on the executive team were like, 'Oh, crap, he's totally right, we have to go change this.' He had absolutely no problem criticizing people above him, and being blunt about it."
Nowadays he is equally demanding and obsessive about Yelp, his "baby." In the early days of the company, he once scolded Keith Rabois, now a Yelp boardmember, for wearing a Yelp t-shirt to the gym. Rabois protested that he was promoting the company, but Stoppelman told him it was a high-quality, vintage t-shirt and that he shouldn't "damage the brand" by working out in it.
He was similarly concerned with establishing a culture at Yelp -- one that he likes to say isn't a "burnout" culture. The workplace is far from the showy funhouses of other buzzy tech startups. It is not a company that lures employees with perks. "We're not Google," Stoppelman says. "We don't have lobster stuffed with caviar every day. It's never been about how we compete on throwing nice things at employees." Indeed, a large fridge in its modest cafeteria is filled, comically, with only condiments and sliced deli meats. Employees play chef, fixing "Yelpwiches" for lunch. (A flier on the fridge in August, also posted all over the San Francisco offices, announces, "THE GREAT YELP MOVE IS UPON US" and encourages employees to remove food before the entire staff relocates a few blocks away to new, larger offices on New Montgomery Street.) "It does not have an intense culture at all," Rabois says, "whereas clearly at PayPal we did. I get the impression Tesla does. You create your own custom cocktail." Yelp's cocktail is an engineer-driven team, passionate about the wonky parts, but with a playful side. Colleagues say that Stoppelman knows his strengths -- product and engineering -- and focuses on them.
Today's product meeting is focused on Yelp's fastest-growing and arguably most important slice: the mobile app. Mobile sees 30% of all Yelp's traffic (that goes up to 50% on weekends) and 59% of all searches. People are using mobile more; thus, it is one of three companywide "themes" for the year. The other two are its international expansion (with a strong emphasis on integrating traffic from Qype, the German competitor Yelp acquired for $50 million a year ago) and, you guessed it, selling more ads (internally they're calling it "closing the loop with local businesses"). But competition in the mobile-ad space is fierce, and some critics say that though Yelp was an early leader in mobile, it waited too long on mobile advertising. It didn't start selling display ads in its app until March, and while 40% of ads show up on mobile, it could have been higher by now.
In June, Google launched Carousel, a local-search product that displays a ticker of businesses and seems squarely aimed at Yelp. Yelp relies on Google for more than half of its traffic, but Stoppelman says that worries him less and less, "even as they've gotten increasingly aggressive in trying to put roadblocks in front of consumers in getting to the Yelp content." In addition to Google, there is Facebook -- in August it launched Graph Search, which offers you up restaurants your friends have liked. "It's really Google and Facebook who are their main competitors for local advertising dollars online," says Wunderlich analyst Blake Harper, who believes the biggest risk for Yelp is that customers turn to one of these giants "because they don't like Yelp's tactics or the way they filter reviews." Below those dual behemoths, there are competitors like TripAdvisor, which focuses on hotels.
If it isn't an already-established giant, perhaps the company to "build the next mousetrap" that Stoppelman says he fears will be a brand new startup, an unimagined competitor. Peter Thiel, an early investor and another mentor of Stoppelman's from their PayPal days, says that Google isn't worth worrying about. "If a much bigger company was going to be able to take them out, they already would have done so. It's not that easy to build these local communities in every city." Indeed, it seems as though Stoppelman's focus on investing in communities and building a product that delights users (both customers and business owners) outweighs his concern with profitability. Thiel says he thinks Yelp will still be around in 2030. If it is, it will likely be because Stoppelman ignored the quick path to profits in favor of the slow climb toward an involved user base.
Of course, Stoppelman has ignored advice from his sages before -- once with Musk, and again with Thiel. In 2011, he and Thiel were out for a run (something they used to do a few times a year "at some critical inflection point for the business," Thiel says) and they got to talking about the state of Yelp. Stoppelman was considering taking his company public. Thiel told him not to. Of course, the rest is history: Stoppelman did, and Yelp's stock, which made its debut at $22 a share in March 2012, is now around $65, up 166% from a year ago.
A shorter version of this story ran in the October 7, 2013 issue of Fortune.