Foursquare Investment: Company Gets $41 Million Injection, But is It a Bad Bet?

Foursquare just checked into its next investment lifeline. The quirky phone app that informs your friends when you are eating at a new Indian restaurant and where it is received $41 million from private equity firm fund Silver Lake Partners and the venture capital firms Andreessen Horowitz, Union Square Ventures, O’Reilly AlphaTech Ventures, and Spark Capital. The move represents the next step forward in the company's funding and provides breathing room for the Internet startup.

Foursquare is smartphone app that allows its user to engage in a location-based social networking. Using the GPS hardware that comes standard in many phones, Foursquare users are awarded points and badges for checking in as much as they can at a variety of locations. Their app follows a concept know as gamification, the use of game thinking and game mechanics in non-game situations. The company was valued in 2011 at $600 million. Can a company based around telling you friends where you are eating lunch really be worth that much investment?

If you look at the numbers, they paint a grimmer picture then the company would like. According to the company's website, Foursquare has 30 million users and over 3 billion check-ins a day. Of course, such a number doesn't differentiate between active users and people who used the app for a little while and then let it lapse, but ignoring that distinction, there is another troubling sign. The company reportedly only brought in $2 million in revenue last year, a troubling sign for the three-year-old company. Negative speculation about the company’s future is not a new sport, with many concerns that Foursquare's finances actually do not add up.

The primary problem is that ads on Foursquare primarily appear on its search page. But people do not utilize Foursquare in a manner to which directs them to its advertisements, using it primarily for its check-in service abilities rather then the manner of a business review website like Yelp, who also promotes a mobile app that competes with Foursquare. Foursquare recent recognized this flaw and gave the app on all platforms a major redesign that puts the search function top and center, in an effort to get more users to use it, see more ads, and allow Foursquare to get more revenue. It is too early to tell if this will break user out of this long established habits or not.

By going with private investors instead of offering investors equity stakes in a big initial public offering, Foursquare does avoid the problems that other members of the new generation of Internet startups have encountered. Most famously Groupon, the online coupon service, raised $700 million in its IPO and had share price at $20 in 2011. Barely a year later in 2012, the company released poor financial numbers and had its stock price fall as low as $2.93.

Even knowing the well-documented trials and mistakes of similar Internet startups does not leave Foursquare immune to their fate. Having a good idea is a dime a dozen. Executing it puts you in the elite. But the real test in the business world is actually making money off it.