Foursquare raises $41M in debt to buy time

The app's popularity has been waning; Foursquare takes on debt to beef up tools and services

As the novelty of checking in has worn off, Foursquare has had to find new ways to stay relevant. The company introduced a new iOS redesign Wednesday that emphasizes search, but they’ve got a ways to go if they’re serious about competing with Yelp.

Now it looks like the company is, indeed, knuckling down. The company announced Thursday that it has, in fact, raised $41 million in a convertible debt round led by Silver Lake Partners’ Waterman growth debt fund. Existing investors Andreessen Horowitz, Union Square Ventures, O’Reilly AlphaTech Ventures, and Spark Capital also participated in the round—all buying convertible debt. The round brings Foursquare’s total raised to $112.4 million.

So why is Foursquare loading itself down with $41 million in debt when it’s still trying to figure out a workable business model? Several reasons.

For starters: it buys time. Foursquare was huge in 2009 and 2010, and then interest started to wane as other companies like Facebook got in on the check-in action. The company has had to find new ways to not only stay relevant, but to monetize. In 2011, Foursquare partnered with Groupon to deliver location-based deals and discounts, but we all know how the daily deal industry ended up.

The company has since attempted to monetize through ads via its search engine, but that hasn’t been paying off as well as expected. Foursquare reportedly brought in just $2 million in revenue last year.

But Foursquare’s valuation has been pegged at some $600 million.

And that’s where the debt comes in. By raising $41 million in debt rather than equity, Foursquare can deflect estimates of its real value. Ay, you’re a tricksy one, Foursquare.

“This is a classic situation where convertible debt was the optimal solution for everyone,” wrote Fred Wilson in a blog post. “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.”

Wilson added: “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.”

Foursquare’s Dennis Crowley revealed that Foursquare now has 33 million users and is used by 1.3 million businesses. Altogether, it has seen over 3.5 billion check-ins.

Crowley said in a blog post that the company plans to build more tools to allow businesses to connect with customers, invest in search, and build the “location layer” for the Internet. Specifically, this summer, Foursquare’s sales team will expand to 40 people—up from just 10 right now. 

"The next few months will see further enhancement to the many ways in which Foursquare can be used. A little while back the company introduced the ability to link credit cardsto one's foursquare account," wrote Union Square Ventures Partner Albert Wenger in a blog post. "The number of specials available for "load-to-card" redemption will grow significantly in the coming months and will eventually be available to all businesses through a self service solution. Unlike any other solution, this does not involve showing your phone to a waiter or someone at checkout. You simply pay and any promotion is applied back to your card."

Image source: angelmendez.es