Can Yahoo Still Nab Foursquare for $125 Million or Will VCs Prevail? The Race for the Hot Mobile Start-Up Nears Its End.

You have to give Yahoo an A for effort, if perhaps the ultimate grade in its ongoing quest to buy hot mobile social network Foursquare is an F.

While Foursquare founder Dennis Crowley–who controls a large chunk of the shares of the start-up–has so far turned down several $100 million-plus offers from Yahoo, sources said the company’s newish head of mergers and acquisitions, Andrew Siegel, is back in New York today still trying to convince him to sell.

So far, especially because the effort has dragged on for a while and Yahoo (YHOO) has not made an overwhelmingly massive show of financial might, Crowley appears to have develop a case of cold feet about marrying the Internet giant.

Sources said Foursquare has so far turned down Yahoo flat.

Meanwhile, two powerful venture firms–Andreessen Horowitz and Khosla Ventures–are putting lucrative new funding deals on the table, trying to entice Foursquare to remain independent and turbocharge its fast-growing status-update service.

Other big firms have dropped out of the race, although sources said more are now sniffing around, including free-spending Russian moneybags, Digital Sky Technologies, which has already sunk copious funds into social networking giant Facebook and games powerhouse Zynga.

Their selling point is freedom, the ability to sell for more later and perhaps a more modest payout for talent, including Crowley, by buying some of their common shares. Their valuation is hovering around $100 million.

“Why sell now, when they are on a roll no one is going to catch them for a year at least,” said one person involved in talks with Foursquare. “There is a lot of benefit in waiting to cash in totally.”

Foursquare has grown dramatically, from 50,000 users less than a year ago to closing in on one million soon.

Despite negligible revenue, Foursquare raised $1.35 million last August, valuing it at $6 million.

Foursquare’s VCs include O’Reilly AlphaTech Ventures and Union Square Ventures, as well as a spate of well-known angel investors.

The choice for Crowley: Take the big pile of money from Yahoo–which is offering all cash, giving Crowley a huge windfall–and run, or double down with VCs.

“Yahoo should just pay a huge premium and scare away the VCs to become relevant among the cool kids again,” said one person close to the situation. “”In my mind, it’s a litmus test for Yahoo.”

Yahoo is well known in the tech space for hemming and hawing over acquisitions. Dithering over price and copyright issues, it famously lost a nearly completed purchase of YouTube to Google (GOOG), which swooped in with a bigger and cleaner offer almost overnight.

A similar scenario played out when Yahoo tried to buy Facebook when it was very small. Facebook not only remained independent but is considered to have surpassed the once mighty company in innovation and consumer appeal.

In addition, as many big companies have, Yahoo has bungled purchases of hot start-ups before, such as Flickr, the pioneering online photo service.

But CEO Carol Bartz has recently made some significant noise about Yahoo starting to engage in some aggressive M&A to attract talent and inject innovation into the company.

Internally, sources said she has told staff that Yahoo has to start engaging externally and with force.

She has mentioned mobile start-ups specifically, and Foursquare is indeed among the hottest in the space, offering its growing base of users an ability to “check in” from a variety of places.

The location-based services arena is heating up, with multiple competitors to Foursquare, such as Gowalla, as well as recent efforts by Facebook and Twitter to enter the space in a big way.

Still, Foursquare is the start-up of the moment among the digerati, striking deals with a wide range of partners, as well as tech giants like Microsoft (MSFT).

Thus, it has attracted a lot of look-sees, from AOL (AOL), Twitter and Google, although none have made a serious effort to buy Foursquare.

Even Facebook has contemplated the start-up, although it is more likely to try replicating its own version of Foursquare, which is could announce at its F8 developers event next week.

Twitter also indicated at its own conference this past week that it will continue to offer similar location features.

The challenge for Foursquare’s Crowley is in the timing, and deciding if he can look such a large gift horse in the mouth.

He sold a similar location service called Dodgeball to Google in 2005, but left the search giant on bad terms two years later. Dodgeball was closed down by Google in early 2009.

At the time, Crowley called the experience of being at a large company “incredibly frustrating,” while Google sources said Crowley was a bit of a frustration to them.

Translation: No tears were shed on either side by his leaving.

In any case, he rebounded with Foursquare and is now being pursued again in the throw-caution-to-the-wind manner some entrepreneurs enjoy.

“It’s an insane offer, in a lot ways, but big enough that we all have to take it seriously,” said one person close to Foursquare.

Insane is what some think Yahoo has to be.

“Yahoo needs to kneecap everyone near Foursquare,” said one with knowledge of the situation. “This is a strategic purchase, not one based on any metric of revenue or users, so it’s just as crazy at $100 million as at $150 million.”

Well, a little crazier, but you get the point.

Yahoo declined to comment, and I have an email into Foursquare, which has yet to respond.

Silicon Alley Insider first wrote about Yahoo’s interest in Foursquare about two weeks ago.