We hear a sharp hissing sound.
Foursquare, once a mobile app that allowed users to “check in” restaurants and stores when launched with great fanfare in 2009, and “once one of New York’s hottest startups” as TechCrunch ominously calls it, apparently needs cash desperately enough that it’s willing to accept a monstrous haircut.
It already raised $162 million in prior venture financing and debt. We don’t know how much of it is left and how much it burned through. But it’s time to go back to the trough – under punishing conditions.
Perhaps it’s the sound of hot air hissing out of the startup funding bubble where billion-dollar valuations for companies with no business model and no revenues have become routine: investors are suddenly looking at them with a more critical eye.
Foursquare is “close to finalizing” a new round of funding that would give it a valuation of only $250 million, Re/code reported. When it raised $35 million in 2013, it did so at a valuation of $650 million. So this round would be a devastating 61% haircut.
At its peak in 2012, Foursquare raised funds at a valuation of $760 million. From that level, its valuation got slashed 67%.
Foursquare is also talking to potential corporate buyers, “sources say,” according to Re/code. “So it could still conceivably sell instead of finishing up the funding, which should raise at least $20 million and as much as $40 million.”
There has long been speculation that Yahoo would buy it as Yahoo has been buying just about anything in order to find something that might successfully distract investors from its own problems.
According to Re/code’s sources, “at least one new investor will participate in this round.” Among the prior investors are Andreessen Horowitz, DFJ Growth, Microsoft, Silver Lake Partners, Spark Capital, and Union Square Ventures.
This type of “down round” – where the current valuation is lower than the valuation at the prior round – is anathema to startup exuberance. All kinds of employee hopes, dreams, and stock options suddenly become worthless. Instant millionaire coders with plans of retirement at 30 are suddenly discovering that they’re working stiffs like everyone else, a sobering experience. Some investors lose their shirts. Founders, if they didn’t protect themselves adequately, might get trampled.
So why would a company do this? TechCrunch:
The current investment environment has led many startups to pack on the pounds to prepare for leaner days potentially ahead. At this juncture, the rewards of getting the money you need to grow outweigh the optics of a decrease in valuation.
But for people who own shares or stock options, down rounds go beyond mere “optics.” They can be devastating. But the “current investment environment,” as TechCrunch put it, is getting tough. Numerous startups have had down rounds. The IPO window has just about closed. Corporate buyers are getting somewhat more reluctant. Investors and employees see fewer possibilities to exchange their startup equity into real money.
Then there are company specific issues. TechCrunch:
Down rounds tend to show both a more conservative interest in the company’s core business, and potentially slowing growth for the startup. Foursquare, essentially, has to find a new way to impress investors with strong growth — which requires some rejiggering.
Have you heard people rave about how they “checked in” at a taco truck in recent years? Me neither. So the company tried to reinvent itself. In May 2014, it separated its check-in and location-sharing app Swarm from its local search and recommendation app Foursquare. In August 2014, it launched a new version of Foursquare that abandoned the check-in and location-sharing functions altogether to focus on local search. Other social networks with similar services have chipped away at its user base. And this split, according to TechCrunch, didn’t do much for its traffic.
Foursquare does have something of value: enormous amounts of user data. Yup, users just thought it was free. And it has some business and advertising services that leverage this data for predictive and other purposes. TechCrunch:
There’s a good reason why the Microsoft part of the story makes sense: It already has a relationship with Foursquare, for one, and as part of that deal it gained access to the company’s significant store of data.
In its last financing round, the deal will had Foursquare’s data contributing to the Bing platform’s location and context layers on both Windows 8 and Windows Phone.
And Microsoft figured out where the future moolah is: in user data. Hence, it tries to shove its flagship product, Windows 10, down your throat “for free” by spamming your Windows 7 or 8 desktop with unstoppable obnoxious popups several times a day, every day, apparently until you cry uncle, because Windows 10 gives it access to your data on your computer. And that is worth a lot more than the one-time sale of the operating system would have been. Your computer just keeps on giving. So investing in Foursquare data and data collection capabilities fits that strategy.
But since everyone is doing it, and since your data which you thought was yours is being commoditized, the value of it has been shrinking. And this coincides with what TechCrunch called the “current investment environment,” where some aspects of reality are beginning to reassert themselves.
Turns out, the party is over in startup land: What is now called “pent-up supply” of IPOs meets a world with no demand. Read… IPOs Collapse, “Worst Year Since 2009,” Worst Dec. since 2008