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Foursquare stays independent, raises cash to fuel expansion

After holding acquisition talks with Facebook Inc. and Yahoo Inc., one of the Internet’s most talked-about start-ups Foursquare has decided to remain independent and has raised a big chunk of cash from a prominent Silicon Valley venture capital firm.

The New York company, which lets people “check in” at bars, restaurants and other hangouts via their smart phones, raised $20 million in a second round of funding led by Andreessen Horowitz that valued the company at $95 million (that's pre-money), general partner Ben Horowitz said in an interview. Foursquare's previous investors also participated in the new funding round. Horowitz said the company’s post-money valuation was $115 million.

Crowley Foursquare will use the money to fuel its expansion as it faces rising competition from social networking sites and other new players staking out the red-hot location-based services business.

Last September, Foursquare raised $1.35 million in a round led by New York venture capital firm Union Square Ventures, a pittance for a company with Foursquare’s growth potential. Foursquare is approaching 1.8 million users, adding about 15,000 users a day, a rate that mirrors that of Facebook and Twitter Inc. in similar stages of their growth, Horowitz said.

“This is a team, this is a market and this is a product that has that kind of potential,” he said.

Silicon Valley is looking to capitalize on Foursquare and services like it that help advertisers reach consumers wherever they are. Foursquare’s search for funding spurred a feeding frenzy in Silicon Valley. Major companies including Facebook, Yahoo and Microsoft Corp. kicked the tires and venture capitalists including Khosla Ventures, Accel Partners and Institutional Venture Partners jockeyed to invest.

Internet guru Marc Andreessen and his longtime partner Horowitz walked away from funding talks in April. Negotiations resumed a few weeks ago when Foursquare Chief Executive Dennis Crowley decided he wanted to build rather than sell the company.

“Dennis Crowley has his eyes on the prize,” Forrester Research analyst Augie Ray said. “Dennis and a lot of other people feel that Foursquare can develop into a major player in the social media space. But it is going to face a lot of competition in trying to do that. Foursquare is very popular now. We will have to watch to see what’s going to happen in the next year or two.”

Foursquare launched in March 2009, picking up where Crowley’s previous start-up, Dodgeball, left off, making it easy for users to let their friends know what they are doing and where they are doing it by checking in online via their cellphones. Crowley sold Dodgeball to Google Inc. in 2005. Google later shut it down.

While the concept was not new, Foursquare goosed its service with rewards for frequent users who can win points and badges worth discounts, prizes and bragging rights. It also attracted influential figures in social media such as Twitter co-founder Jack Dorsey.

Foursquare has grown to 27 employees from five in January. Its latest recruit is Yahoo senior director Holger Luedorf, who is Foursquare’s vice president for mobile and partnerships.

Not yet profitable, Foursquare is still trying to figure out how to turn its legions of rabid users into a viable business model as competition mounts. Twitter recently added a location feature. And Facebook is on the verge of adding one. Archrival Gowalla Inc. has a similar check-in site.

These services have begun to take off with the rapid adoption of smart phones and GPS devices, but still are used by only a small fraction of the U.S. population. According to an upcoming report from Forrester Research, only 4% of adults say they regularly use the services, and 84% say they have not heard of applications for checking in such as Foursquare and Gowalla. The 4% who are users tend to be trendsetters, with 86% of them under the age of 43, Forrester found.

Horowitz points out that Foursquare has lined up Starbucks Corp., Bravo TV, Marc Jacobs and more than 10,000 other businesses to give away coupons and offers without any sales staff.

“The opportunity is really gigantic. What Foursquare has done is quite unique: They have cracked the code which from a pure business standpoint has been a bit of a Holy Grail and almost impossible to do -- to get a central approach to local markets,” Horowitz said.

Mobile advertising that targets users near where their phones say they are could grow to $3 billion in annual advertising spend by 2014 up from $200 million currently, said Kip Cassino, research director at consulting firm Borrell Associates.

“This is a piece of advertising that almost every kind of retailer is going to want to be a part of,” Cassino said.

Location-based advertising worries consumer advocates who fear such services will invade privacy.

“Consumers have to become more vigilant about how their location data becomes part of a profile to be targeted by marketers and others,” said Jeffrey Chester, executive director for the Center for Digital Democracy in Washington.

-- Jessica Guynn

Follow me at twitter.com/jguynn

Photo: Dennis Crowley on the cover of Wired magazine. Credit: Dennis Crowley

 
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