Aside from what Path is worth, the way in which Foursquare will monetize its user base and dataset is perhaps the most popular conversation over the second cocktail in Silicon Valley. At least if I’m there. Today, in a Fast Company profile, new figures were disclosed concerning Foursquare’s revenue: It’s growing.
Ben Horowitz, a Foursquare investor, told Fast Company’s Austin Carr that Foursquare had brought in more than four times its total 2012 revenue by around the middle of the year. As both Carr and Alyson Shontell have noted, that puts Foursquare’s 2013 top line on a run rate between $15 million and $20 million.
Compared to 2012’s painfully paltry $2 million in revenue, the new figures are — and we’re leaning on data released by an investor with a firm financial interest in Foursquare’s success — almost rosy. However, at its 2013 revenue pace, can Foursquare break even? Can it drive meaningful profit?
Foursquare’s CEO and founder Dennis Crowley told Carr that his company has 160 employees. The old rule of thumb was that you could mentally budget $100,000 per employee in yearly costs, after taking into account rent, insurance costs, and the like. However, given Foursquare’s split profile between San Francisco and New York, I think that the old rule is outdated and far too conservative. Let’s be polite and assume that the figure is $150,000 per worker, giving Foursquare costs in 2013, for personnel alone, of $24 million.
So before servers, advertising, expansion and SXSW parties are taken into account, Foursquare is still set to lose money in 2013. And I’d wager that its cash burn isn’t small. It has cash now, raised via convertible debt, but those accounts will depress in time. Foursquare will then have to raise money from private investors, the public markets, or seek an exit.
Its ability to do any of the three will depend on its ability to accelerate its revenue growth in dollar terms, and, if it wants to go public, demonstrate profitability, at least briefly. Can it?
Inside of Carr’s profile is a telling paragraph, delineating how Foursquare might generate new revenue. I quote at length to preserve voice:
The biggest near-term revenue will likely come from the 1.4 million local merchants on the platform. The company plans to start charging them for its ad products on a cost-per-action basis later this year, which could prove a boon to its bottom line. “Maybe you’re slow during the day, so when people search for a lunch spot, you run an ad in the neighborhood for your rotisserie chicken salad. Say we showed the ad a hundred times and six people showed up within the next three hours–that’s a pretty good conversation rate,” Crowley says. “So maybe we pick up $200 per month from that venue. Take that from 10% to 20% of our million venues, and that’s $20 million to $40 million a year.”
That would be, given Crowley’s estimates, a doubling or trebling of Foursquare’s current — and potentially overly kind — revenue forecasts.
But in fact it isn’t a particularly harmonious product fit to the current trends that Foursquare is encountering. The company is working to allow for more passive usage of its service. Presumably to both bolster active engagement, and perhaps bring lapsed users such as myself back into the fold.
The above example demands that a business owner be at once monitoring their business, and then turning to Foursquare on a continuing basis, a relationship that I think is unlikely to occur. Attention of the owner of a restaurant is always short, and to expect that person to use Foursquare on a chronic basis is perhaps optimistic. Yes, there is a potential of financial remuneration for the small-business person, but would it be consistent enough to warrant consistent use?
Crowley’s example of $200 in monthly revenue would likely require such usage.
The crass point at this juncture would be to state that if Foursquare can grow its user base it likely could be a consistent driver of such sales. However, the company has struggled to continue user acquisition on par with rates that it previously enjoyed.
I would estimate that at its current revenue growth rate, Foursquare will be able to raise more capital, which it will need. $2 million to $20 million in a year is a wonderful multiple, and Foursquare’s dedicated fans are not about to abandon the service. However, I’d argue that the second $20 million in revenue for Foursquare will be a more interesting tranche of top line; Foursquare is currently monetizing its service as a green field. Put more simply, the next set of apples may be further up the tree.
Foursquare wanted to raise capital at a $700 million or $800 million valuation, but instead took on cash without putting a new sticker price on itself. For comparison, the market currently values Yelp at north of $3 billion. However, Yelp’s revenue was $55 million in the most recent quarter. Using crude math, assuming say $200 million in Yelp revenue in 2013 and $20 million for Foursquare, the latter would be worth about $330 million using Yelp’s current multiples. That’s about half of Foursquare’s 2011 valuation of $600 million.
Assuming that Horowitz’s numbers are accurate, Foursquare is at last demonstrating that it can generate eight-figure revenue from its social location service. But that answers only the first in a brace of questions. Still, there were those who didn’t expect the company to make it this far.
They were wrong.
Top Image Credit: Jo Jakeman