The location check-in service Foursquare completed a $20 million round of financing last week valuing the company at $95 million. This valuation has brought up some questions: Is Foursquare really worth that much money and if so how will their investors recoup their investment in the newest darling of the social world?
The largest investor, Andreessen Horowitz, believes that the ways to monetize Foursquare are “very obvious and straightforward.” To emphasize this point Horowitz asks, “Would you pay to know your most frequent customer?”. He goes further by saying that location is actually not the major selling point of Foursquare, but that one day location will be “a feature of maybe every product.” Horowitz then, of course, paraphrases the law of network value (Metcalfe’s law) by stating that “If everyone you know is on Foursquare, everywhere you go, the more valuable it is.”
The 80/20 Rule of Social Networks
The 80/20 rule works in more scenarios than I can think of and it applies to social networks too. In any network 80% of the users are passive and 20% are active. Following this rule are the 75 million users on Twitter, 17% of whom Tweet each month (12.75 million people.) Of the roughly 2 million users on Foursquare, assuming 20% active means that about 400,000 users actively check-in to a location each month.
Social Network Critical Mass
According to Metcalfe’s law of network value, every network has a critical mass of connectivity at which point the benefits of the network grow larger than the cost of building the network. Every social network has a number of people that are required to get to this critical mass and this number can be determined by dividing the cost per connection by the value per connection. So what is the number of users required to reach critical mass for Foursquare? If their cost per connection is very high then their value per connection needs to be high as well to bring the number down. To me it seems that the cost per connection is relatively low, but the value to the individual user is drastically lower.
Answer this question: What do you gain from participating in Foursquare?
If your answer is “not much” or a free coffee (Starbucks being the goto example), then you are contributing to what I perceive to be a prohibitively high critical mass of users whose perceived value is not very high. If you answered something more along the lines of “its fun to become the mayor” or “I enjoy knowing where my friends are” these are probably more in the camp of something you “like” rather than place high value in. Please correct me if I’m wrong.
Foursquare with 400K or even 1 million active users does not provide enough benefit to a broad spectrum of businesses for those businesses to in turn increase the value to a user by incentivizing usage of Foursquare. So what came first the Chicken or the Value?
Authors Note: I am an early adopter that is hopeful that Foursquare will succeed as a platform.
