According to financial research company PrivCo, Foursquare has serious money problems.  The Wall Street Journal estimates that Foursquare made a paltry $2 million dollars in 2012, and Business Insider reports that Foursquare has been unsuccessfully trying to raise additional funds for the last year (Foursquare has raised $70 million to date).

With due respect to location-specific Mayors and users who have put significant effort into badge acquisition, Foursquare is a great case study for businesses to understand the risks of developing communities on social networks. 

What are investors looking for in a social network?

In their report PrivCo writes:

“This shows that not only is Foursquare’s audience too small for a consumer-oriented Internet company to attract meaningful ad dollars, but its web traffic numbers are flat, with no reversal on the horizon; this is a likely death spiral for a consumer social network….”

This is the cold truth that businesses and social media users need to understand about the stability and viability of social networks.  Note what PrivCo writes: “too small,”"traffic flat,” “no reversal.”  In order for social networks to secure investment (and scale their operations) they have to be big and be growing audience, or must have great potential to do either.  Some businesses may have found success with small, vibrant social communities, but investors understand that likelihood of advertising success grows with the size of the network.  It’s probably not coincidental that institutional investors started to invest in Facebook when FB abandoned their “social proof” advertising model and let advertisers show ads agnostic of social ties.

Foursquare just did a big overhaul and will probably continue to morph this year as their financial situation becomes less tenable.  Think about businesses that invested in Foursquare advertising, displaying “check-in here on Foursquare” stickers on their door.  Imagine if they would have channeled those reviews to Google or created an email list or devoted those resources to AdWords.  Facebook or Twitter probably would have offered more re-engagement opportunities than participating on Foursquare.  But Foursquare is a really hip, trendy platform and that probably kept people from making a more pragmatic assessment of the network.

Don’t budget for free lunches

One of the common frustrations of the last year has been the morphing of Facebook and Twitter to support their monetization efforts.  Developers were cut off from Twitter and Facebook users had their content filtered and “augmented” by LOTS of ads.  Lost in user discontent was the fact that these are the bellwether social networks.  They are the standard for every other social network out there.

Maybe businesses can be fooled once, but as the bellwether social networks restrict reach to try and generate revenue should businesses be surprised when others follow suit?   The people offering free stuff are always going to want to generate revenue from users or businesses further down the line.  So maybe from the get-go business should budget accordingly.  What is the valuable for devoting resource to a Facebook community if you’re not prepared to pay for it eventually?

My hope is that Foursquare’s struggles cause businesses to articulate what they want to accomplish, assess social platforms against other marketing vehicles and develop a way to measure effectiveness.  Of course none of that will actually happen.

Tell me what you think about Foursquare’s struggles and if you see this as a precedent for other social upstarts?

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Jim Dougherty

Writer and chief of miscellany at leaderswest.com

I aspire to give people something to think about rather than tell them what to do. My favorite Google Alert is “social media research,” I am increasingly compelled by Gen Z, and I appreciate good writers agnostic of where they write. At one time I was Kred’s 12th most influential social media blogger and Klout’s most influential person on the topic of David Hasselhoff. Transplant from Seattle living in Cincinnati. Haven’t entirely adopted the local sports teams yet.

@jimdougherty

Writer about social media and tech at Leaders West, I also tweet as @leaderswest.

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