Peter Kafka

Recent Posts by Peter Kafka

Foursquare Gets Its Money

dennis_crowley-featureSo here’s one question answered: Foursquare did indeed raise another round of financing — it’s getting $41 million in a round led by Silver Lake.

One question unanswered: How much do investors think Foursquare is worth? We don’t know, exactly, because this round is all debt: Silver Lake is giving the company a multiyear loan, and the other investors — Andreessen Horowitz, Union Square Ventures, O’Reilly AlphaTech Ventures and Spark Capital — are all buying convertible debt.

Why does that matter? Because “by taking on debt, rather than giving investors equity stakes, Foursquare delays a public debate about its true worth,” said Bloomberg Businessweek, which has the details on this one.

Here’s even more detail from investor Fred Wilson, whose Union Square has been a longtime Foursquare backer, on the logic behind the debt round:

Valuation is somewhat immaterial to us as our stake in the company is not going to increase much in this round of financing. But valuation is very material to the Foursquare management team because $41mm of capital is going to be dilutive at any valuation that would make sense here.

So the optimal structure is convertible debt. That means this round is not dilutive to the Foursquare management at this time. But it will be dilutive when the debt converts into equity, most likely at the next equity issuance. For the investors, we get the comfort of knowing that eventually our investment will become equity and we will not have to price it. Someone else will.

My educated guess, though, is that Silver Lake, et al, still believe that Foursquare is worth something close to the $600 million the company was pegged at in 2011. Yelp, the company’s obvious public comp, has a market cap of $1.6 billion.

Whatever the valuation is, it’s not going to be based on a multiple of revenue: The company brought in just $2 million last year, Businessweek said. Not unrelated: Yesterday, the company rolled out a redesign that is supposed to emphasize local search, a market that digital guys have been trying to monetize, without much success, for a very long time.

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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik