Investment Report | Research and Analysis of Foursquare

IS $100 MILLION IS A FAIR VALUATION FOR FOURSQUARE?

In Sept 09, Foursquare was only valued at $7 million – $14 million. Recently, Yahoo is targeting Foursquare at $100 million. We see the spike in valuation within just a short span of time and my question is whether $100 million is a fair valuation for Foursquare? In 2007, we see Facebook turning down an offer of $1 billion by Yahoo Inc. back and in 2008, Twitter rejecting Facebook’s offer of $500 million in 2008. Apparently $100 million may not be so much after all if Foursquare is able to rise up the ranks of Facebook or Twitter in time to come.

Some VCs explained that Foursquare’s valuation of $100 Million was due to the fact that there isn’t that many good start up companies to invest in despite them having the money to invest. Thus, a slightly above average company may be valued beyond the fair valuation due to demand and supply factors. Furthermore, they are investing not because they believe that Foursquare would gain mass market adoption but in hope that larger companies will believe that Foursquare can gain mass consumer adoption and purchase it at a higher price. However, to understand the valuation of Foursquare, I will be analyzing their fundamentals in two main aspects namely competitors and revenue stream.

COMPETITORS

The closest competitor of Foursquare at this moment is Gowalla, which is another location-based social networking service. Both applications are good in providing games, incentives and rewards. Gowalla is available in 7500 cities as compared to Foursquare’s 100 major cities. However, in due time, Foursquare would be available almost anywhere. Foursquare on the other hand trumps Gowalla in aspects such as friend management, check-in location accuracy, value added features like a city guide device, to do list and device support. Thus, by comparing the pros and cons of two of the leading services, clearly Foursquare outshine Gowalla and if this continues, Foursquare would eventually take over as the market leader for location-based services. Furthermore, Foursquare is like a complement to Twitter, it serves as a feature set to Facebook, it is not completely about map like Google Latitude, and its interest is not in local businesses like Yelp. Thus, Foursquare is right in the middle of all of these folks and not being a direct competitor to them.

REVENUE STREAM

Foursquare’s short and medium term revenue will be generated based on location-based advertising while its long run revenue would be based on genuine world-wide advertisements and promotions. To further illustrate Foursquare’s long run revenue stream, we see Foursquare moving beyond the retail sector to strike deals with companies like Zagat's, Bravo and the History Channel. Furthermore, with the increased in the number of users, 50% - 60% every month, Foursquare expects to hit 1.5 million users by the end of May, which highlights the potential of moving towards mass market adoption in due time if the trend continues. Personally I feel that that Foursquare’s future market would be enormous. For example, government agency such as tourism board, charitable organization and event organizers could leverage on Foursquare to create more awareness and publicity for a fee. Also, Foursquare might want to enter into a joint venture with Linkedin to further create career networking opportunities anywhere and anytime for those who are willing pay a subscription fee to enjoy the exclusive information. Users will have the option to display or not display their information so as to avoid the issue of privacy.

In conclusion, Foursquare does has a sound business model with relatively undefined market boundaries. It is interesting and fun, and more importantly, it creates value to both the buyers and sellers. Foursquare is like the ‘invisible’ middle man for anyone in any parts of the world. With all the facts gathered, I believe Foursquare’s current valuation is fair and will continue to rise as I trust that it would be able to rise up the ranks of Facebook and Twitter in time to come. Thus, I would RECOMMEND A BUY.

REFERENCES

http://techcrunch.com/2010/03/25/four-vc-firms-battle-for-foursquare-valuation-goes-stratospheric/#ixzz0o6hTF0zu

http://www.androidpolice.com/2010/04/08/foursquare-may-walk-away-from-100-million-are-they-crazy-or-thinking-big/

http://joetrippi.com/blog/?p=2958

http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2010/04/07/businessinsider-why-vcs-think-foursquare-is-worth-100-million-2010-4.DTL#ixzz0o8RlRJaJ

http://www.dailyfinance.com/story/company-news/foursquare-ceo-dennis-crowley-my-phone-rings-off-the-hook/19446003/?icid=main|aim|dl9|link1|http:

http://radar.oreilly.com/2010/03/foursquare-location-apps.html