FourSquare and money lying on the ground (Updated)

Recently, I registered to a one year old internet service called FourSquare (foursquare.com). FourSquare caused new internet hype with adding 100 000 additional users just in ten days in March 2010. Estimates for current number of users are amounting 1 mil. Allegedly, Yahoo offered $125 mil. for the company, although it's valuation based on its capital is $6 mil. FourSquare is most frequently compared to Twitter, recently valued at $1.44 bil., which is 240 times as much as FourSquare's current value. According to web analytics firm Compete, Twitter had 22 mil. visitors in December 2009, which is 22 times more than FourSquare. In conclusion, investors value future cash stream of one Twitter customer as $65.5 and FourSquare customer $6. Building upon investors valuations, is FourSquare under or overvalued? Lets look deeper in FourSquare's history, what it does and it's business model.

FourSquare has been founded by Dennis Crowley and Naveen Selvadurai after trying similar project with Google called Dodgeball in 2005. It was probably too early for such a project as Google shut down the service in 2009. Dennis and Naveen should thank Google for the time and money it invested to shape the product as FourSquare is sometimes called DogeBall 2.0. So, what is ForSquare about? Actually, it's a mix of location based social network and a game. After registering to the service (you can link your Facebook and Twitter account), you mark the places you visit in a good old fashioned physical world and get various virtual badges . After collecting the right badges, you can actually get discounts and gifts at various bars, restaurants, food chains etc. I believe that the badges concept was taken from Microsoft's XBox Live service where you gather achievements for completing special task in games or on-line. Similarly as achievements, badges earn you honor when ranking with other folks at the FourSquare and more importantly guide users to specific behavior like going to places you want them to go. And here we are getting to the FourSquare business model. For instance, if you are a restaurant owner and want to attract more customers, you go to the FourSquare's paid Dashboard application, where you can offer specials for people, who step by in your place. Moreover, all the users, who checked in to your place, let their friends know over FourSquare site so that you get a multiplication effect by 21st century "word of mouth" advertising. Another source of revenue will be marketing statistics about consumer behavior, which could serve big companies like Coca Cola and Starbucks to track, who is coming to their stores.

Nice idea? Local internet advertisement business is estimated to be worth of $10 billion and so far nobody could tackle it in a proper way. I believe that FourSquare is on the right track to make a big cut from this market for several reasons:

1. It's a community service so that updates about hot vs. not so hot places will happen really quickly
   
2. FourSquare put its stakes to mobile internet, which is growing by building application for all major mobile platforms
   
3. It is gaining critical mass of users thanks to ability to import friends from Facebook and Twitter
   
4. Last but not least, FourSquare is very easy to use…
   

My opinion is that Foursquare has a more sustainable business model than today's Twitter and therefore it's valuation could be even higher than $125 mil. On the other hand, the threats on the way could be the "second movers" like Twitter, which announced its service @anywhere and Facebook. Moreover, in January 2010, users were coming to FourSquare from three main sources:

1. From Google 24%
2. From Twitter 21%
3. From Facebook 19%

It means that if Twitter and Facebook create their own location based services, FourSquare could theoretically loose 40% of its incremental user's base. Given the FourSquare's three digits growth in users base, the speed of competitors move is crucial. This competitive risk is most probably the reason of mediocre FourSquare's valuation. I place my bets on FourSquare!