Business

$41M Silver Lake loan keeps Foursquare afloat

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Foursquare has a long way to go to prove its worth to investors — and it may never get there.

After months of trying to raise money, the pioneering location-sharing service, co-founded by CEO Dennis Crowley, ended up getting $41 million — mostly in loans — to stay afloat while it races to ramp up its ad business.

The loan was necessary because Crowley failed to convince investors that Foursquare was worth more than it was two years ago, according to sources.

Crowley had been searching for months for investors to at least match the company’s 2011 valuation of $600 million, which it reached after raising $50 million. That was during a peak of venture activity buoyed by Facebook and its peers, when valuations soared on investor interest in all things social.

The latest financing signals that Foursquare has plummeted in value and that time is running out for a company that was once one of New York’s hottest startups, according to industry insiders.

“Foursquare is at a crossroad, entering this phase where we’ll know everything in the next six months,” said one venture capital insider.

“They’ve got to prove they’ve got a business.”

Foursquare announced the cash infusion yesterday, most of which came from private-equity firm Silver Lake Partners. No one bought shares in the company.

Founded in 2009, Foursquare rode the launch of a new wave of mobile devices like iPhones. The company that pioneered check-ins — where people would connect with friends and broadcast their whereabouts in the real world — is evolving into a local search and discovery engine that competes with the likes of Yelp and Google.

The private company has tried to create a business advertising to its more than 25 million subscribers — only a fraction of whom are considered active. Last year, revenue was estimated at just $2 million.

Early investors took part in the latest fund-raising round, but only put in a small portion of the $41 million.

“Silver Lake is now essentially in control of this company,” said Sam Hamadeh, CEO of Privco, a research firm that tracks startups.

One of Foursquare’s earliest investors, Fred Wilson of Union Square Ventures, discussed the financing on his blog yesterday, saying the deal staves off the need to revalue Foursquare until a hoped-for new equity fundraising round.

“This round is not dilutive to the Foursquare management at this time. But it will be dilutive when the debt converts into equity, most likely at the next equity issuance,” Wilson wrote.

Foursquare is not the only New York firm caught up in the most recent dotcom euphoria.

Microblogging service Tumblr, another New York City startup, also faces money issues with revenue below $10 million last year, said Hamadeh.

“You can’t paint all these companies with one brush,” another Silicon Alley source said yesterday.

“Some have very mature business models, but others that are still searching may run into a situation akin to the Foursquare deal, where debt or down rounds may be necessary.”