Checking Into What’s Behind Foursquare’s $41 Million Infusion

Photograph by David Paul Morris/Bloomberg

Foursquare CEO Dennis Crowley is hoping to use a new round of cash to prove that his mobile app can be a viable business.

Foursquare, the New York-based company that makes an application for checking into locations and discovering places to go, just got a big cash infusion. This comes after months of doom and gloom talk about the company’s future, Bloomberg Businessweek reported today.

The round, structured primarily as a loan, won’t quiet the critics. But let’s check out the factors at play.

What happened?

Investors just gave Foursquare a bit more time to prove its business model in the form of $41 million. In addition to keeping things running, Foursquare plans to use some of the money to increase the company’s salesforce from about 10 to about 40 people and to hire more engineers.

A big initiative is expected to come in the summer when Foursquare plans to open a self-serve advertising platform. And by the end of the year, Foursquare will injects ads into other parts of the app, such as when a user checks in somewhere, said Steven Rosenblatt, the company’s chief revenue officer.

So what did investors value the company at?

This round didn’t bring an updated valuation because nobody bought shares in the company. It’s mostly in the form of a loan from Silver Lake, along with convertible notes, which can be converted into shares later, from investors that already own pieces of Foursquare.

A $50 million investment in 2011 valued Foursquare at $600 million, at a time when it wasn’t generating significant revenue. Last year, the company introduced new ad units, helping to bring in $2 million, people familiar with Foursquare’s finances told Businessweek.

The company and prospective investors couldn’t agree on how to value the business. Convertible debt allows them to delay the conversation while Foursquare tests the new self-serve ad system that it’s particularly bullish about.

“This protects us — and protects them — as it converts at a discount to what happens next,” said Ben Horowitz, who co-founded the venture-capital firm Andreessen Horowitz. ”If things go well or if things go poorly, we’re protected.”

Bloomberg LP, the parent of Bloomberg.com, is an investor in Andreessen Horowitz.

But why a loan from Silver Lake? Isn’t that a private-equity company?

Yes, but this loan isn’t from the same part of Silver Lake that’s bidding to take Dell private. The Silver Lake Waterman fund is specifically for late-stage private tech companies. The loan is set to be repaid with interest over several years, Foursquare Chief Operating Officer Evan Cohen said. Shawn O’Neill, a managing director at Silver Lake, will join Foursquare’s board of directors as an observer.

Are people still using Foursquare?

Foursquare said its user base is getting more active. The company is seeing an average of 6 million check-ins per day this month, compared with 4 million per day in January 2012 and 1.5 million a day in January 2011.

But recently, Foursquare has been more actively touting its search and discovery function, called Explore. It’s the only place the company serves ads right now. Explore gets about 2 million queries a day, compared with 350,000 a day in the months after it was released two years ago, according to the company.

Critics question whether this classifies as the type of explosive growth the 4-year-old company should be seeing at this point in its life.

How far along is Foursquare in its business plan?

Foursquare has a long way to go. It has about 50 advertising partners and has run about 100 campaigns with them, the company said. Dennis Crowley, the co-founder and chief executive officer, said the company has “proved its hypothesis” with search advertising. “We have the whole story laid out; we built a lot of the pieces; we know where we’re going. Now we just have to execute on all these things. That’s why getting the fundraising behind us is so important.”

Foursquare will also have to impress upon its users that the service is not just about checking into locations. “You would still get a lot of people who think we’re about points and badges and being the mayor of the library,” Crowley said. “But we’re a real-time heat map of where things are going on in the world.”

How long can investors wait?

Investors say they still have high hopes for Foursquare, though they are getting a bit impatient.

“Is it taking us longer to get here than I would have hoped? Yeah, absolutely,” said Albert Wenger, a partner at Union Square Ventures. “Sometimes that happens. But it’s better in the end to take a little bit longer than you would have thought to get there and get the ingredients right.”

Horowitz said, “We hope to see it be a real business that makes money sometime between 2013 and 2014.”

 

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