Foursquare is in a bit of a bind. The location-based social networking service is looking to raise a reported $20 million to $40 million for its next investment round, based on the idea that the company, which has 8 million users, is worth as much as $500 million. The problem? Foursquare has yet to demonstrate a successful revenue model—or even show that its principals care much about coming up with one that can justify that kind of valuation.
"We're focused right now on making the experience better," Tristan Walker, Foursquare's head of business development, said in an interview with Fast Company last year. "How can we charge for that? We don't know."
Indeed, Foursquare’s revenue appears to be basically negligible at the moment, and the company is OK with that. “The point is not to become profitable now, but to grow," co-founder Dennis Crowley said in December. "Our business model is to create and sell tools to local merchants. When we figure out what is actually working on the local merchant front, then we’ll pull that lever.”
Considering Crowley's vocal opposition to traditional display advertising, the local merchant front seems to be Foursquare’s only revenue option. In his interview with Fast Company, Walker discussed “a Google AdWords-like model, where merchants can have featured placement based on latitude and longitude, time of day, or day of the week."
The company has been testing out location-based deals with big-name brands for about a year now. For instance, a chance to win a $40 gift card when you check in to your local Starbucks or discounts at local stores when you use American Express. But most of these tests haven’t generated any revenue for Foursquare.
Meanwhile, much larger—and more financially sound—competitors are claiming Foursquare’s space. Groupon, the daily group coupon service that has 70 million subscribers and generated $760 million in 2010, is about to launch the Groupon Now app, which will enable subscribers to find real-time deals at nearby businesses. And it has 6,000 employees—many of whom are salespeople—to Foursquare’s 60. LivingSocial, a Groupon competitor, has already tested a similar service in Washington, D.C. To top all of that off, on Monday, social networking's biggest player, Facebook, entered the space with Facebook Deals, a so-called "Groupon-killer" currently being tested in five cities.
Any comparison to these competitors would no doubt irk Foursquare’s co-founders. “It goes beyond just seeing what deals are nearby,” Crowley said at this year’s South by Southwest festival in Austin, Texas, in March. “We’re creating recommendation engines for the real world.” But recommendations don’t pay unless they’re sponsored by businesses—and businesses look to be gravitating toward more widely used services. Indeed, Starbucks CEO Howard Schultz joined Groupon’s board of directors in February.
Responding to a request for comment for this story, Foursquare spokeswoman Erin Gleason said in an email: "We don’t discuss rumors or speculation. Our team is 100 percent focused on building a product that changes the way people explore the world around them. That's what we do all day every day."