Mike Arrington is reporting that Foursquare is about to close a monster round of financing. Foursquare raised a seed round of just over $1 million from some great seed investors including Union Square Ventures, O’Reilly AlphaTech Ventures, Jack Dorsey, Kevin Rose, Alex Rainert, Ron Conway, Joshua Schachter, Chad Stoller, Sergio Salvatore

I’ve been hearing the same and believe that it’s a sweet deal for whoever gets the position. Foursquare which is far from mainstream adoption is doing great. They have validated the local check in concept. Clearly a winner there.

There is much to do beyond where Foursquare is today. Foursquare is very gimmicky in that it feels like the early days of Facebook platform – remember throwing sheep? That being said Foursquare has what I refer to as "great headroom" – the ability to pivot to a mobile ad model with a compelling user centric application. Although I’m not a power user at all of Foursquare, I like what they are doing. It’s game changing (as is Gowalla and MyTown). However, critical mass will win the day. There is really only room for two players in this market. MyTown has their work cut out for them.

Right now, it’s Gowalla and Foursquare leading the location based "check in app" market. Foursquare is smart to bulk up on funding. I would suggest that they add some serious senior talent to the team – not that the current team is not capable but instead more for extra "horsepower" – bus dev, marketing, and of course engineering. The founding team must remain the creative driving force.

Venture Capital Implications

This is a fascinating real time case study of what is happening in venture capital. It’s really interesting. This deal validates the trend of "momentum investing" where angels and super angels are playing. There are hundreds of new startup companies that fall into this category. For example a startup that just launched at Demo called Brandfolium which has a product called Go-NavID.com which is a social rewards offering (paid tweets play).

For emerging stratups like Go-NavID this new ecosystem is important. For example Go-NavID wins if Foursquare wins. There are many more examples that come from this new landscape. The big issue is that traditional venture doesn’t want to play in this area – it’s too risky.

Validation For The New Angel Investor

Most traditional firms hate these kinds of early Foursquare deals because they can’t handle the changing landscape of the market. However if these small "out side the box deals" get momentum the big boys (Accel, KPCB, Sequoia) jump all over it.

Super angel investor Mike Maples talks about this when he says that the best growth companies need to pivot as they grow and most VCs prevent entrepreneurs from changing their original business model. Most of the lazy VCs call it failure when the entrepreneur’s original business model that they invested in doesn’t pan out. I can speak from experience because it happened to me at my last venture backed startup Podtech – I was fired by the board when the original podcasting plan didn’t work out and the board refused to pivot. They instead booted me and ran the company into the ground which will never happen again to me (I’ll go there in another post).

Chegg Case Study – Old School VC Would Have Fired CEO And Killed Chegg

As a way of example lets look at Mike Maples and Gabriel Ventures investment in Chegg – a hot IPO coming out now with a killer experienced CEO Dan Rosensweig. Chegg’s original business plan was tweaked from it’s orginaal and the founder’s creativiey allowed them to vector or pivot to a growth part of their market.

Here is the Chegg venture case study (from my research on this deal):
1) Maples does the seed investment
2) Maples connects with Gabriel Ventures to lead the Series B
3) entrepreneurial team (with Maples and Gabriel help) pivot to renting textbooks thus killing their original business model
4) their new business model is a home run
5) big boys fund heavily
6) Chegg grows, revenue kicks in they start printing money
7) hire kick ass CEO,
8 ) now Chegg are IPO bound.

My case study of my recent venture backed failure Illustrates the above Chegg point further. The Chegg example is in dark contrast to my last venture backed company (podtech) where we couldn’t get past the board wanting to bring in new management to make my original business plan a success. At that time podcasting was doomed when Apple iTunes went to free and the venture need to pivot. It didn’t then died. This is a very common story in Silicon Valley.

Startup Market At Early Stage Is Booming – New Kind of Entrepreneur and Investors Emerging

Super angels along with new groups like YCombinator, and our own SiliconAngle Labs (which is starting to dabble in seed investments), are really helping entrepreneurs get in the market. It’s a numbers game the more startups in the market creates more competition. The new Internet entrepreneur has to not only be resourceful but creative and fast. For the investors they have to be fast and value add.

It’s a great time for creativity and development in the Internet venture area, but it takes a new way of thinking. Unfortunately for the old school lazy VCs this new model doesn’t favor them. There will be more competition for these "winner" deals like Foursquare. The action is the early stage and the winning investors are those that truly add value. Value add is the differentiators and just money isn’t value add anymore.