ReachLocal closes $55M round

By George White

October 9, 2007 — Internet advertising startup ReachLocal Inc. has closed a $55.2 million Series D venture financing to offer small local businesses the same services that aQuantive Inc. and ValueClick Inc. provide to Fortune 500 companies.

The fourth round was led by New York-based Rho Ventures, with participation from Galleon Crossover Fund, also of New York, and existing investor VantagePoint Venture Partners of San Bruno, Calif.

The current round gives ReachLocal a total of $67.9 million in equity financing since it was founded in January 2004.

ReachLocal's CEO Zorik Gordon declined to give a specific figure on the company's valuation for the round, but numerous blogs reported that the Series D valuation was roughly $305 million, an increase of $55 million above its Series C valuation of $250 million.

The Woodland Hills, Calif.-based company acts as a middleman for small businesses that want to advertise online. The company manages the entire process that local businesses need to create, maintain, track and analyze Internet search advertising campaigns, allowing small businesses to advertise using Google Inc., Yahoo! Inc., MSN, Superpages.com and others.

"Advertising online is complicated; it is fragmented; there are multiple places where you need to do it. That's where ReachLocal's services come into play," said Gordon. "We make it as simple as writing one check, and our sales team handles the rest. That's what was missing in the marketplace."

The market for online advertising by small businesses is poised to explode in coming years, according to Princeton, N.J., research firm Kelsey Group, which forecasts that global Internet Yellow Pages and local search advertising will grow from $4.1 billion in 2006 to $11.1 billion globally in 2011.

ReachLocal has been riding that wave, as its revenues have been "more than doubling every year since its inception," according to Gordon, a rate that he expects will continue.

ReachLocal plans to use the new capital to accelerate its product and sales force expansion both domestically and internationally, according to Gordon.

"We're trying to grab as much of this market as we can. The purpose of the round is to get really aggressive," said Gordon. "We're concentrating on large metropolitan markets. That's where the market is today, big cities like Los Angeles, New York and such."

In the last 12 months, ReachLocal has opened 11 sales offices across the country and directly manages the online marketing efforts of tens of thousands of local businesses. ReachLocal currently has more than 300 employees and a network of sales offices in major cities that target local businesses that advertise significantly in places like the Yellow Pages.

"Our target customers are display advertisers, the businesses that already are advertising and understand the need for it," says Gordon. "They're understanding now how much of their business has moved from where they have historically been advertising to online."

Although competitors in the local Internet advertising space will have to quickly adjust to ReachLocal's suddenly deep pockets, the size of valuation venture firms were willing to put on ReachLocal will likely swell their valuations as well.

Other startups that target small business for Internet advertising include WebVisible Inc. and Weblistic Inc., while competing services are offered by R.H. Donnelly Inc.'s LocalLaunch and Idearc Media Corp.'s Inceptor.

Savvian Advisors LLC was the financial adviser to ReachLocal in the transaction. Latham & Watkins LLP represented the company, while Pillsbury Winthrop Shaw Pittman LLP was counsel to the investors.