Foursquare’s New Cash, New Focus: Why Local is So Damn Hard

Back in 2009, with the smartphone revolution just taking off, savvy app-makers started playing around with ways to use the iPhone’s GPS features, tracking where users are in real time. The sharpest among them, it turned out, wound up building little games that encouraged people to “check in” at places they visited in the real world.

In the tech world time-warp, that was eons ago. Today, Foursquare is the undisputed champion of the location-based app world—and it’s still not clear what that that crown is worth, exactly.

The private New York-based company is in the headlines for a new $41 million loan to fuel its next phase of growth, putting its total private investment haul at more than $100 million.

Foursquare also has unveiled a new version of its service, which more emphatically changes its focus from social check-in game to local search engine, putting it in a head-to-head competition with mighty Google.

As CEO Dennis Crowley told Bloomberg Businessweek, the new money gives Foursquare some time “to prove that there’s a real business here.” Businessweek also reported that today, the business brings in about $2 million in annual revenue.

That’s not chump change, especially if you consider Foursquare’s assertions that it hasn’t spent any money on advertising, has a tiny sales staff, and actually blocks some big accounts from buying ads on its service. But at this point, it’s not anything to write home about. So the question remains: Why has making money been so tough?

It’s one of the more vexing problems of this era in innovation, and as we’ve pointed out before, everyone from the biggest tech companies to the newest startups is looking for the answer.

Facebook, for example, has tried repeatedly to crack the nut in local discovery, including buying out Foursquare’s vanquished runner-up, Gowalla. Google has tried too, adding social and review data to its baseline maps application, along with separate apps.

Startups all over the country have also attacked the market, with some of them being acquired. Aside from Gowalla, we’ve seen PayPal buying Boston’s Where and Yahoo snapping up the small team at Seattle’s Alike.

Still more small companies are at it. Boston’s Spindle, founded by Microsoft veterans, is focusing on social media to help set apart its app for finding interesting places and events. Boulder, CO-based Tagwhat also is looking to social media to find discounts for users of its app, called Feed.

Another Boston startup, Block Avenue, has been adding a wider array of information on neighborhoods—including Foursquare’s—to give users a deep view of what’s going on near them, from social events to recent crimes.

The reason there’s so much focus on this particular area is pretty simple. Local businesses represent a huge, mostly untapped market for digital advertisers who can deliver customers and make the register ring. With a super-powerful computer in many people’s pockets, the ability to unlock all that value looks like it’s within reach.

But that could also prove to be a mirage. It’s happened before with the local business market, several times over just in the Internet age.

One of the better investor-bloggers out there, Chris DeVore of Seattle-based Founder’s Co-op, speaks from experience when he lays out the generational and cultural reasons why entrepreneurs should dodge small and medium-sized businesses.

In short, DeVore says, most local business owners are too consumed with the nuts and bolts of running a restaurant or dry cleaner and can’t bother with your newfangled smartphone app or advertising network. That means it takes a massive sales force to sign them up, and even then they tend to go out of business a lot.

As a consumer of Foursquare’s local search product, I also worry about this problem. It means that wealthier, more stable advertisers could dominate as the company makes search its main focus. I need a “local discovery” app to seek out new, interesting, truly local places, especially when I’m somewhere unfamiliar. But those little guys aren’t going to bring home the bacon for Foursquare’s financiers, who could start getting impatient in the next few years.

That’s not to say making Foursquare into a lasting business is hopeless. But it’s been harder to crack this nut than many people might have thought, Crowley and company included—otherwise, there wouldn’t have been this multimillion-dollar loan and a huge shift toward competing with some of the biggest names in tech.

“How this all plays out is anyone’s guess, but I like where Google and Foursquare stand best of all right now,” says Fred Wilson of Union Square Ventures, a Foursquare investor.

“Google has awesome place data but misses the social/personal piece. Facebook has awesome social/personal data but misses the place/geo piece. Apple sort of misses both right now but with enough investment, they can get there,” Wilson says. “Yelp is more of a directory and has very little social data. They are at the most risk from Google since their strength is Google’s strength. Foursquare has both awesome place data (and 40,000 apps that use their place API) and awesome social data.”

But what about the small companies? Can startups being developed in Foursquare’s wake make it too, if the leader is having such a hard time? In Boston, Block Avenue CEO Tony Longo says yes—and he thinks there’s still another wave of opportunity for entrepreneurs at the local level.

Of all the local data feeds that Block Avenue pulls together, Longo says, Foursquare’s is clearly the best. And that means Foursquare can become, as Crowley has sold it, “the location layer for the Internet,” a platform company that opens the door for follow-on companies that use its data in new ways.

“I’m betting on the space with myself personally, with this company,” Longo says. “I think it’s just starting, and I think this is the year.”

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One response to “Foursquare’s New Cash, New Focus: Why Local is So Damn Hard”

  1. Allen Rice says:

    Interesting! Good info – Learned a few things here. Trying to start up a small local business in a small place of billings montana, fixing iPads iPhones etc.. not a new or novel idea by any means, but like this article says.. hopefully a niche left at the local level.