Foursquare resorts to debt in latest financing

Foursquare said on Thursday it raised $41 million in a new financing round that relied on debt, rather than equity, to give the start-up the money it needs to keep expanding.

April 12, 2013
Foursquare logo

Foursquare, a service that helps smartphone users find nearby restaurants, shopping venues, clubs and tourist attractions, said on Thursday it raised $41 million in a new financing round that relied on debt, rather than equity, to give the start-up the money it needs to keep expanding.

The cash came from a new investment by technology private-equity firm Silver Lake, through its Waterman growth debt fund, as well as existing investors Andreessen Horowitz, O’Reilly AlphaTech Ventures, Spark Capital, and Union Square Ventures, Foursquare founder Dennis Crowley wrote in a blog.

The Silver Lake money is a loan that has to be repaid over several years. Existing investors bought the convertible debt, according to Fred Wilson, principal of Union Square.

Debt financing is unusual for start-ups, which typically rely on selling equity to early investors. Resorting to debt is typically considered a sign of stress in the venture capital community. It mounts pressure on young companies, which may not have a lot of revenue or earnings to repay such obligations.

LivingSocial, a struggling daily deal start-up that competes with Groupon Inc, had to issue new equity with debt-like aspects, such as an annual dividend, in its latest financing round earlier this year.

“I haven’t seen anything this bad in a while, and certainly not something so high profile,” said Rocky Agrawal, a Silicon Valley-based analyst who focuses on mobile technology and payments. “It’s not very far from this LivingSocial—just structured differently.”

Foursquare launched to much fanfare in 2009, but has since struggled to generate revenue from its business. The company is now focusing more on its search capabilities, which allow users to track down stores and other physical locations through smartphone apps.

Foursquare has just started building revenue-generating businesses such as services that help local businesses find new customers and market to them. This will be “much more developed” in the next year, Wilson said.

Foursquare generated $2 million in 2012 revenue, according to Bloomberg Businessweek, which reported the Foursquare financing earlier on Thursday.

Crowley declined to comment on Foursquare’s revenue, however he said that the company did not begin to focus on revenue generation until last year.

Crowley also said that investors “had a hard time” valuing Foursquare because the company is changing so quickly.

In June 2011, Foursquare raised $50 million at a $600 million valuation from Andreessen Horowitz, Union Square, Spark Capital, O’Reilly AlphaTech and CrunchFund.

The latest $41 million financing was structured to avoid investors having to come up with a valuation for Foursquare right now, according to Crowley and others.

Foursquare will have to pay interest on the new debt it issued to Silver Lake. Interest is also typically paid on convertible debt. Later on, this type of security can convert to equity in certain agreed-upon circumstances, potentially diluting existing shareholders’ investments.

“My general take on convertible debt is that it’s very good for the founders and not very good for the investors in seed and early stage investments and a much better solution in late-stage financings,” Union Square’s Wilson wrote in a blog on Thursday.

For Foursquare, convertible debt is the “optimal solution for everyone,” Wilson added.

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

If the strategy works out, and revenue increases, that will make the company easier to value. At that point, it could issue new equity and the convertible debt would be exchanged for new stock.

“We get the comfort of knowing that eventually our investment will become equity,” Wilson said. “In situations where a valuation inflection point is on the horizon, convertible debt can be an excellent structure.”

(Reporting by Alistair Barr; Editing by Bernadette Baum and David Gregorio)

More software news

Facebook Home to build Android outpost

Windows helps to save data

WhatsApp denies Google buy-out rumour

Nokia Music+ launched in South Africa

Tags: Active, Foursquare

Free Email Newsletter:
Subscribe

Shutterstock is the image partner of MyBroadband – technology images can be found here

Join the conversation

Connect with MyBB

twitterfacebookandroidappleblackberrynewsletterfeed

Poll

Which smartphone do you have?

View Results

Loading ... Loading ...

More News

What’s next for the smartphone?

Nokia X Android smartphone range

It should be no surprise to anyone that many smartphones may have been designed to last about 24 months

Online anonymity: a prized possession

Privacy

Internet use has come full circle, with anonymity becoming prized after years of personal info being shared online, writes Alistair Fairweather

Blocking Islamic State’s online propaganda – good or bad?

Information security privacy password hacking crypto

Before considering whether blocking content damages democracy – it would – instead ask who stands to gain

SABC COO to appeal court-ordered suspension

Hlaudi Motsoeneng

SABC chief operating officer Hlaudi Motsoeneng is appealing the Western Cape High Court order on his suspension, the public broadcaster reported on Friday

Free MyBroadband Newsletter:
Subscribe
X
bool(true)