When Dennis Crowley debuted Foursquare, his location-based social media app, at South by Southwest in 2009, he got rave reviews. The tech blog Mashable called Foursquare the “breakout mobile app” of the event. VentureBeat called it “the next Twitter.” At this year’s SXSW, Crowley, 36, had to remind people his company still exists.
For many users, the novelty of telling friends they’ve “checked in” to a store or restaurant, earning real discounts and virtual badges, has worn off. Foursquare’s main source of revenue, ads on its search engine, has been a disappointment, in part because many users don’t realize the app offers search. As a result, Foursquare has been slow to make money from mobile ads geared to a user’s location.
Foursquare brought in just $2 million in revenue last year, according to a person familiar with its finances who declined to be identified because the company is private. A January report by PrivCo, a research firm specializing in private companies, predicted the company would die by the end of the year. On March 17, venture capitalist and Yelp (YELP) board member Keith Rabois tweeted that Foursquare’s only hope was a buyout.
As it turns out, Foursquare has other options. In early April the company got $41 million from private equity fund Silver Lake Partners and venture capital firms Andreessen Horowitz, Union Square Ventures, O’Reilly AlphaTech Ventures, and Spark Capital. The bulk of the money is a multiyear loan from Silver Lake; the rest is convertible debt that can eventually be swapped for shares. By taking on debt, rather than giving investors equity stakes, Foursquare delays a public debate about its true worth. (Early investment rounds valued the company at $600 million.)
The money also buys Crowley time to expand. “This allows us to get closer to being able to prove that there’s a real business here,” he says. Until now, Foursquare hasn’t spent a dime on advertising its services, even online. Although more than a million merchants have signed up to be listed on its app, the company allows only about fifty of them, mostly national chains like Starwood Hotels (HOT) and Walgreens (WAG), to buy ads. Crowley employs just 10 people to sell ad space on the app’s search function to big national accounts. By comparison, the online coupon site Groupon (GRPN) has thousands of salespeople.
With Groupon’s stock price down 69 percent from its November 2011 initial public offering, Crowley says his slow-growth approach has been vindicated. “We’ve looked at the way other companies have grown very, very aggressively with products that seem to be working but are not the ones that end up changing the landscape,” he says.
This summer, Foursquare will let all the merchants it works with buy ads and will expand its sales team to about 40 people. Foursquare is also updating the app to highlight its search function, something Crowley admits was “buried” in previous designs. By the end of the year, users who check in at stores or restaurants may get ads related to their location. That means when a shopper goes to Best Buy (BBY), Samsung will be able to send them an ad for its TVs.
More than 40,000 applications have built Foursquare’s platform into their app, rather than building their own location databases. This lets Foursquare collect data from popular apps including Path, a mobile social network; Vine, Twitter’s video feature; and Instagram (FB), the photo-sharing network. A new revenue-sharing deal with Visa (V) and MasterCard (MA) allows people to upload their credit-card information and get discounts.
Foursquare has the data to predict where people want to go based on their friends’ behavior, as well as the tools to record whether they actually went to the store that sent them an ad, and if so, how much they spent. It’s a seductive combination for mobile advertisers, and early results suggest that it’s working. When someone gets sent an ad from a nearby coffee shop after searching for a latte on Foursquare, between 3 percent and 5 percent of the time she’ll click on the ad or visit the shop within 72 hours, according to Steven Rosenblatt, Foursquare’s chief revenue officer. That compares with an average click-through rate of less than 1 percent for all mobile ads, according to ad network Chitika. To Crowley, it’s an encouraging sign. “It’s just now starting to work,” he says in his office, wearing a Syracuse University hoodie and jeans.
John Lilly, a partner at Greylock Partners, a Silicon Valley venture capital firm, declined to invest in this round of financing because he thinks Foursquare’s $600 million valuation is too high. Those who jumped in say they’re willing to let Foursquare take its time. “This will be a very important public company one day,” says Bijan Sabet, a general partner at Spark Capital. “And I am in no rush.”
The bottom line: Foursquare has raised $41 million in debt-financing, cash it intends to use to expand into a more robust recommendation tool.
