FOURSQUARE HAS FEW REVENUES, BUT ANDREESEN HOROWITZ SAYS ITS WORTH $250 MILLION, OH REALLY?

Foursquare Labs Inc., the wireless service that lets users broadcast their whereabouts to friends, is valued at more than $250 million and will probably hold another round of financing later this year, its co-founder said.

The service, with more than 6 million users, “pulls in some revenue from big brands,” although it’s not yet interested in offering shares to the public, co-founder Naveen Selvadurai said in an interview at the MIDEM music industry conference in Cannes, France, this weekend.

In 2010, Foursquare increased its user base by 3,400 percent, “Honestly, 2010 was just insane,” reads the site’s blog.  When you consider Foursquare’s competition, those numbers are very modest. 

Foursquare, which Selvadurai said will probably have 10 million users by June, faces increasing competition from location-based services now offered by social media sites Facebook Inc. and Twitter Inc. Foursquare expects to profit by forming more partnership with local businesses and offering more recommendations, including places to have dinner or grab a drink after a music concert or show.

“Other sites want to keep you inside at the computer, while our entire goal is to get you out of the house,” Selvadurai said.

New York City-based Foursquare will probably double the number of its employees to 120 by the end of the year, he said. The company in June 2010 raised $20 million from investors led by Andreessen Horowitz, in a deal that valued it at $120 million, he said.

The site, which has advertising deals with companies like PepsiCo Inc., Safeway Inc. and Zagat Survey LLC, has 60 percent of its users in the U.S.

Twitter Chairman Jack Dorsey is a Foursquare investor. The mobile-payments company Dorsey started last year, Square Inc., shares office space with Foursquare at its New York location, Selvadurai said.

COMMENTARY:    My, my.  What a difference a year makes.  At the start of 2010, Foursquare had approximately 1 million users.  At the end of 2010, Foursquare had 6 million users, an astonishing growth rate in new users of 3,400%.   Member's checked-in 381 billion times, too.  In the month of December 2010, Foursquare generated 2 million check-ins.   Man, I'm impressed even more.  Reminds me of the crazy growth period experienced by Twitter between 2009 and 2010.  So, when will Foursquare hit 10 million users?  According to Business2Community, Foursquare will reach 10 million registered users by July 9, 2011.  When you can predict things down to the exact day, I'm triple impressive.  

Andreessen Horowitz, a Silicon Valley venture capital firm co-founded by Marc Andreessen and Ben Horowitz in 2009, made a $20 million second round investment in Foursquare on June 29, 2010, placing a value of $95 million on Foursquare.  In the above article, Andreesen Horowitz says Foursquare was valued at $120 million in June 2010, not $95 million.  That's a difference of $25 million.  So where did that additional $25 million come from?  Six months later Foursquare is worth $250 million.  So what happened between June 2010 and December 2010 to account for this phenomenal increase in valuation?

In December 2010, TechCrunch reported that Dennis Crowley implied to Le Web founder Loic Lemur that he turned down an offer in the “ballpark” of $140 million, most likely from Facebook or Yahoo. Pretty nifty for something that “wasn’t meant to be a company.”   

So where are these incredible valuations coming from?   It's not the revenues.  It can't be.   There are hardly any.  Naveen Selvadurai, a Foursquare co-founder, said that Foursquare “pulls in some revenue from big brands.”  In the parlence of business, that's an admission that Foursquare has hardly any revenues.  You notice he didn't say much about local advertiser's

So what is Foursquare's business model, or how do they generate revenues?   I found the answers are on Foursquare's website:  

According to Foursquare for Business, the company has two services that it offers brands:

• Brand Engagement - This service is for brands that are not tied to a specific physical location, like a consumer packaged good, TV channel, university, manufacturer, or an upcoming movie release.  Foursquare claims that it has hundreds of  "brand partners" using their service to reach millions of users on Foursquare, including Bravo TV, Louis Vuitton, The New York Times, Havaianas, Microsoft Windows Live, the History Channel, Syracuse University, Red Bull and NASA. For these types of partners, Foursquare provides two main marketing tools – Pages and Partner Badges - that help lead their consumers and fans to do interesting things in their neighborhoods and communities.  
  
  • Pages are the brand's custom homepage on Foursquare, the epicenter of all brand engagement.  A brand's fans can “follow” the brand (similar to Twitter), allowing them to see Tips, the equivalent of a Tweet, that the brand has left around the world.  A Tip is a nugget of information tied to a location. Every brand has a unique area of expertise associated with real-world experiences, and Tips are their way to communicate them to their followers. When one of their followers checks in nearby, their Tip will pop up on their screen. 
  • Partner Badges are fun rewards for exploration, but tied to your objectives as a brand. For example:
    • Zagat awards badges to users who frequent Zagat rated restaurants.
    • Lucky Magazine gives them to those who checked in to recommended fashion boutiques.
    • Toys’R’Us created a badge to reward loyal holiday shoppers with Black Friday discounts.
    • CNN supported a healthy lifestyle with a Healthy Eater badge for users that checked in to farmers markets.
    • Project Red created social buzz for World’s Aid Day with a (RED) badge.
• Foursquare Merchant Platform - For national and local merchants and other venue owners, Foursquare offers a free set of tools to help them create Specials or deals, like mobile coupons, prizes or discounts, which are presented to users when they check in at or near the merchant's store, so that they can attract new customers and keep their best ones coming back.  Foursquare provides merchants with a Venue Stats Dashboard which provides them with valuable user data to help them determine what’s working and get more customers. To drive additional traffic to each merchant, Foursquare users earn badges (points) for sharing information about those Specials with their Foursquare friends.

I am assuming that Foursquare makes money from the Merchant Platform by splitting the revenues generated from a merchant's specials. What isn't too clear is how Foursquare makes money from the Brand Engagement service.

I didn't want to say this, but Foursquare exists only because of the good graces of that $20 million second round investment by Andreesen Horowitz. 

Foursquare's CEO David Crowley openly admits that it has some major competitors, but believes that the company will need to raise additional venture capital in order to increase its staffing from about 50 to 120 people in 2011 in order to grow revenues.  Sounds like Foursquare is burning through that second round like torch.   

What we have here are a lot of unanswered questions, and most importantly, no reasonable explanation that I know of for increasing Foursquare's valuation from $95 million in June 2010 to $250 million today.  Only Andreesen Horowitz and Foursquare CEO Dennis Crowley know how the current valuation was derived.   I do know this:  Foursquare's valuation cannot be based on actual revenue performance.  It has few revenues.   Therefore, I can only assume that the current valuation is based on future revenue potential.

I have always had a problem with future revenue potential, because of the risk and uncertainty associated with forecasting future revenues.  This is especially true when your are a startup, your business model is evolving, there is no reliable revenue predictability, and you are competing with larger startups like Groupon, Facebook Places, LocalSocial, Google Offerings and about 300 other insignificant startups, who are in the daily deals business. 

To make things worst, it's a commonly known that location-based check-in services has a huge adoption problem.   According to PEW Research, only 4% of adult internet users use location-based check-in services like Foursquare or Gowalla on a regular basis. Only 1% use these services daily.

Here are some other finds of the PEW Research:

• 7% of adults who go online with their mobile phone use a location-based service.
• 8% of online adults ages 18-29 use location-based services, significantly more than online adults in any other age group.
• 10% of online Hispanics use these services – significantly more than online whites (3%) or online blacks (5%).
• 6% of online men use a location-based service such as Foursquare or Gowalla, compared with 3% of online women.

So when are those revenues coming?  Must we wait until Foursquare hits that 10 million user plateau in June 2011?

I am willing to bet that Foursquare users are spreadout primarily in the top 25 metro markets.  Brands are looking for eyeballs or impressions or the number of people actually likely to check-in and take advantage of a deal.  1.0 million daily check-ins (Using the above 381 million check-ins in 2010 divided by 365 days), is a nice number, but not the kind of numbers that will thrill advertisers.  Furthermore, 80% of Foursquare members are male.   The daily check-ins by gender are as follows:

• Male = 1 million daily check-ins x 80% = 800,000 daily check-ins  
• Female = 1 million daily check-ins x 20% = 200,000 daily check-ins

The gender gap really places a limit on the kind of advertiser's that will use Foursquare. 

There is a big difference between checking-in with a merchant, and actually cashing in on a deal, but since I don't know the closing ratio it is difficult to calculate any kind of ROI.  Since many deals require multiple check-ins, I am willing to bet dollars-to-donuts that the attrition rates are at least 80%, and I am being rather generous.  If we assume the latter, 640,000 males and 160,000 females dropout never redeem that deal out of frustration.  Today's Millennials and Gen-Y's have never been known for their patience.  They want it now.   If we assume that the closing ratio on redemption is 25% (again, I am being generous), and applied this to the 160,000 males and 40,000 females, that actually redeem the merchant's offer, the result would be as follows:

• Number of users:  200,000 (160,000 males and 40,000 females).
• Closing ratio:  25%
• Number individuals redeeming an offer:  25,000

Keep in mind that I wittled down that 1 million daily check-in number to 25,000 individuals that actually redeemed a merchant's offer.   No wonder Foursquare only "pulls in some revenue from big brands".  

Houston, we have a problem.  Advertiser's are interested in impressions (lots and lots of eyeballs, something akin to a Facebook or Twitter), and 6 million or 10 million Foursquare users is not going to cut the mustard. 

If the above weren't enough, privacy us a major issue.  As mentioned before, the huge gender gap  or ratio of males to females is 8-2.  User's simply do not want to be tracked by brands.  So what are we to make out of this?    

In an October 29, 2010 article in the Silicon Alley Business Insider,  a Facebook insider told Business Insider, that about 30 million people (now estimated to be 40 million) had tried Facebook Places.  Larry Yu, a Facebook rep was asked to provide further details on Facebook Places on usage, but he said, "[I] don't have any guidance to offer right now, I'm afraid."     

According to Business Insider, back in October there were 150 million Facebook member's using their mobile phones to log into Facebook.  The idea that one-in-five of them have tried Facebook Places isn't a shock.  What is a shock is how few check-ins Places is seeing from these millions of users.

The bottom line is this:  6 million, 10 million or whatever Foursquare's membership is going to be by the end of 2011, doesn't mean much if the brands cannot get behind location-based check-in services in large numbers.   Foursquare's 6 million members are spread throughout the U.S. and internationally.   Audience reach is a real issue.  Brands are not interested in small numbers, which means that unless you are a major brand with many store locations, Foursquare is not going to benefit you very much.

Only Foursquare and its investor's, in their infinite wisdom, know how they are going to overcome the audience reach issue, gender gap, fear of being tracked and low LBS participation rates.   It better be a dewsey in order to justify that $250 million valuation.  

Just to make my point, I am going to assume that Andreesen Horowitz's $250 million valuation was based on a multiple of "future" revenues. Just for the hell of it let's make some assumptions: 

• Revenue multiple: 60x revenues. 
• Estimated revenues: $4.160 million (250 million divided by 60).
• Revenues per user:  $0.69 cents ($4.160 million divide 6 million users.  Facebook's revenue per user is about $3.5. 
  

If we used that figure of ten million users by June 2011, that would yield revenues of $6.9 million.  If Foursquare has to ramp payroll and administrative expenses for a staff of 120, that is going to burn through that $6.9 million in revenues very quickly, including most of that $20 million investment from Andreesen Horowitz.  No wonder Dennis Crowley admits they will have to raise additional capital.        

Lordy, lordy.  Foursquare's revenue model doesn't scale very well, does it?  If scalability is the problem with location-based check-in services similar to Foursquare, it could help explain why Facebook is not making much making much of a dent, hardly mentioning Facebook Places revenues, but that subject is ammunition for a later discussion of Facebook.

  Courtesy of an article dated January 23, 2011 appearing in Bloomberg Mobile and an article dated January 18, 2011 appearing in Business2Community

Comments

[Tommy]

Santa,

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Tommy

[santa]

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[tasuku]

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[Tommy]

Sonny, thanks for your comment.

[Sonny Yang]

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