Foursquare Hints At Evolution After Getting $20 Million

After a protracted set of M&A discussions with Yahoo and Facebook (and perhaps others), Foursquare announced that it had secured $20 million in funding from several VCs: Union Square Ventures, O’Reilly AlphaTech Ventures and Andreessen Horowitz. CEO Dennis Crowley discussed the funding and how it would be used in his blog post:

With this new round of financing, our main priority will be to expand our organization to supplement the amazing core team we’ve assembled already (know any great engineers? send them our way!). We’re hoping to build a world-class engineering organization, based primarily in our headquarters in New York City, to help us develop the next generation of mobile + social + local products that will excite our users and provide unique value for local merchants . . .

Investors Fred Wilson (Union Square) and Ben Horowitz offered their own perspectives in separate posts on their own blogs. First Wilson:

The conversations with potential acquirers were very beneficial to the founders and the company in many ways. It helped them to understand what the risks of going it alone were versus the risks of selling. And both have risks if you are thinking about the service, the users, the team, and the shareholders (in that order). And it allowed the founders to develop close working relationships with some of the most important Internet companies who can not only be acquirers but also distribution partners and monetization partners.

Horowitz elaborates on these but here are his primary reasons for investing:

• A great Founder/CEO: Dennis Crowley
• A killer product
• A gigantic market

Horowitz is looking at the market at a very high level. Down in the “weeds,” there are numerous challenges Foursquare faces.

Crowley is smart and has done lots of things right. Foursquare is also the “brand” in the geo-social gaming segment, despite being slightly smaller than lesser-known competitors MyTown and Gowalla.

But as Crowley has previously said, checking-in is becoming a “commodity.” Yelp, Where and others have incorporated it into their mobile apps. So what will enable Foursquare to maintain its lead and visibility in the segment? And how will Foursquare “mainstream” LBS gaming or drive enough adoption to really get to scale?

Those are questions I think about. And there are those (including at least one executive at Microsoft) convinced that the company is not creating enough value for consumers to be sustainable. But I would add that Twitter faced similar skepticism and head scratching in its earliest days as well.

There’s also the question of the business model. There are a number of traditional publishers and brands that are using the site for marketing purposes, as well as “10,000 businesses” (presumably SMBs), says Horowitz:

The Wall Street Journal, The New York Times, Zagat, Bravo TV, Starbucks, C-SPAN, Marc Jacobs and over 10,000 businesses are currently working with Foursquare to build customer loyalty and drive traffic.

But many of those local businesses wouldn’t want to pay anything for it:

That is not conclusive evidence that Foursquare couldn’t develop compelling products for SMBs but it’s an extremely challenging market to penetrate.

In Crowley’s post he hints that the product will evolve over time and/or that the company may build other offerings as well. Foursquare’s timing is good and, other than Yelp, it may be the best positioned among its immediate competitors (i.e., Gowalla, MyTown, Loopt, Brightkite). Facebook is something of a wild card. However now Foursquare needs to go from a novel and “cool” app to a real business.

That may ultimately not be a huge issue though. Because the “end-game” for Foursquare is probably still an acquisition by a larger internet company.