Foursquare Kisses All The Frogs And The Rise of Andreeseen Horowitz – A Venture Story

image Foursquare just announced that they have secured $20 million in additional financing at a $95 million valuation, with Silicon Valley’s Andreessen Horowitz leading the new investment.  Also stepping up in the round is previous investors Union Square Ventures and O’Reilly AlphaTech Ventures.

Kara Swisher has been tracking this development over the past few months.  Kara has a great angle on it.  Fred Wilson of course thinks Foursquare is perfect and Kara is wrong. I think Kara is correct in her story.  She is just telling it like it is.  Foursquare basically went "kissing all the frogs" and Andreessen Horowitz is the prince.

This is a story of how an entrepreneur plays the market and the rise of the new guard in Venture Capital  in Silicon Valley – Andreeseen Horowitz.

Going It Alone – Building Durable Sustainable Companies

Of course, I’ve been passively watching this unfold in the backchannel of Silicon Valley here in Palo Alto.  Lots of VCs are telling me their stories about the deal.  As an entrepreneur I’m a fan of Foursquare and their team in that they are growing although I don’t use the service in any way.  From a pragmatic risk and viability perspective, I think that they should have sold, but going alone is what entrepreneurs do – I applaud that.

Let me state the obvious this financing is about Foursquare Going For It.  They want to go big not "trip on pennies to pick up the big dollars".

What I like is the mindset of the founders and investors.  Foursquare, Andreeseen Horowitz, Union Square, and O’Reilly are saying "lets build a big sustainable company – a durable company.  Translation:  they are saying "screw the build and flip mindset".  We need more of that in Silicon Valley and in technology ventures.  There just isn’t that mindset in Silicon Valley anymore where entrepreneurs and investors strive to build durable sustainable companies.  So this is refreshing to see the big money pile in.

It’s About The Future

On Foursquare they just aren’t a viable company in their current state.  Their current site and service is a gimmick kinda like Slide when "throwing sheep" was fashionable. However, the user uptake for Foursquare is a sign of the bigger trend that is relevant.  The preferred user behavior is at the edge of the network and a big feature or platform will be about and have a location aspect to it (whatever that becomes).

So this Foursquare stuff is not about checking in today, but instead about what Foursquare can become in the future – a platform not a feature (or gimmick).  From a venture standpoint this is what they call a risk factor or key business assumption.  The only way to minimize this risk is to be in the market with a boatload of resources both capital and people.  Foursquare will need to evolve from a gimmick to a "real" value proposition.  This will be their challenge and dominate the discussion in their board meetings.  It will be difficult and will require flawless execution.

Here the decision to go alone by Foursquare is "gutsy".  As I mentioned above, Foursquare’s technical and business model will have to change fast.   After kissing all the frogs in the capital and M&A market, they ended up in the same spot they started.  The fact is Foursquare has good investors and by adding Andreessen Horowitz gets them a player who gets the big play and isn’t afraid to "throw the ball down the field".

Andreessen Horowitz even use the words like "Fat Company" to speak to how a big pile of cash can really "win the market".  This is in dark contrast to all the super angel funds sprinkling 50k and 100k here an there.  Even worse is VC funds who have zillion partners too much money and are stuck in gridlock.

Andreeseen Horowitz is no stranger to having "guts".  Ben Horowitz is blogging hard and pushing a strong message out to the market on how to build companies and more importantly he’s schooling many of the "back ass VCs" who are just not adding any value.  Case in point:  when Andreeseen Horowitz was pitching their VC fund for early stage they said they would do little deals then Bam! $50 million in Skype.  The LPs were scratching their heads – $50m for Skype.. Yes that was an early stage deal and granted a large one in Skype.  A deal I blogged about as a genius move.  As far as early stage deals go, doing Skype was pure genius and a no-brainer investment.

Foursquare Tries To Run The Auction – Don’t Think It Was Necessary

From a venture perspective Foursquare went out to "test the waters".  In raising money this is a normal thing and a good strategy (as Fred Wilson pointed out).  However, Foursquare played this hand a bit to much.  The reality is that there are only a 2-3 venture firms who can really handle a deal like Foursquare and not screw it up.  So I’m not sure the kind of public auction was necessary.

Having a great venture partner in this deal is critical, and it’s clear that the founder really wanted to flex his muscle on who that is.  His last company he left a lot on the table in terms of finaical upside and more importantly entrepreneurial creativity.  This Foursquare dynamic reminds me of Mark Pinkus experience with Zynga.  Mark was getting traction right away and was very selective in picking his venture partners because of his experience getting screwed in the past.  Dennis Crowley seems to be taking the same approach.  This might explain the public aspect of how he ran his financing – the so called auction or "bidding".

Given the risk profile mentioned above Foursquare ended up in the same spot.   Not sure how much they added to their valuation if any from their process, but surely must have been a big distraction.

Venture Capital In a Fish Bowl

At the end of the day Foursquare process really highlights how public these VC deals have become with blogs and  twitter watching every move.  For me I think Foursquare is in a good spot from a fundamental perspective: they have a experienced founder (who has scar tissue), good investors who think and fund big (who won’t nickle and dime him), and a future market in some location play.

Times have changed and we are all living in a fish bowl so trying to do old school moves like backchannelling, disinformation, running an auction, etc all could blow up in the face of the entreprenuers and investors.  I was just talking to an entrepreneur the other day that the notion of stealth mode may soon be extinct.  Call is Venture Capital 2.0 or Entrepreneur 2.0 – either way the new world is upon us.

My Angle: Great Venture Story, but What Now

There are market forces that provide some doubt to Foursquare’s opportunity.  There is a massive change in the marketplace and technical infrastructure from the big players that could impact Foursquare’s plans.  Additionally, a new entrant could come in given that costs to enter the market are low.  All it takes is one team of entrepreneurs using ruby on rails and some cloud backend to whip up a killer product fast to beat Foursquare.  If someone beats Foursquare with the "formula" that creates real value that startup or company win the market.

Today, Foursquare provides great entertainment and vanity value.  Everything else is an experiment in search of the ideal business model.

Foursquare’s future is all about how they move from social and trendy to tangible and relevant.  In other words can they create a valuable user experience and provide business value for someone to pay them money for.

We’ll "check in" with them to find out.

Here are the blog post from the founder Dennis Crowley and Ben Horowitz on their "Angles" on the funding.

Dennis Crowley post on his funding angle – We’re just getting started…

Ben Horowitz on his funding angle – Why Andreessen Horowitz Invested in Foursquare