Yesterday I wrote about just how quickly FourSquare seemed to lose their competitive advantage in the location space. As I pointed out, it’s not that they’re not leading the manual “check-in” market. It’s that it’s becoming increasingly clear that the “check-in” model isn’t going to be the one that prevails in the location space. Something that emerges later on is going to have to gain more universal adoption and there’s a good chance that FourSquare’s lead in the “check-in” space has the distinct possibility of handcuffing them from creating whatever comes next effectively. While it’s worth noting that none of this is set in stone yet, and it is certainly possible that FourSquare’s legacy check-in business won’t hinder (and could even help) whatever comes next in location-based services there is a distinct possibility right now that foursquare will get passed by.
As I wrote yesterday, this is not a new phenomenon. It’s been lamented about many times (most notably by Clay Christensen). is startling is the speed at which this happened to Foursquare and that it happened without the company ever really reaching a profitable run. Let’s look at history for some perspective. Look at Borders Bookstores. The company was founded in 1971 and quickly came up with a way to innovatively get the right books to the right stores based on the customer types. This led to quicker inventory turns and higher margins. The company profitably grew for the next 30 years reaching almost 1300 stores by 2003. They were so focused on the profits of their model though that they failed to notice e-readers and the internet were poised to destroy their business. They didn’t create the nook as Barnes & Noble did and by the time they had those ideas they were declaring bankruptcy earlier this year. There start in 1971 wasn’t too different from Foursquares and if (allow me some speculation) a new way of handling the local social market comes out next year then Borders and Foursquare will have a similar demise. The difference is that spot in the middle where Borders made all that money. Where did that time and money go for a company like Foursquare?
The answer is complex, but I’ll volunteer a couple thoughts. The time is gone because in spite of the size of Foursquare and the billion check-ins, the idea didn’t work (unlike the bookstore idea which worked for 30 years). How did a company grow that large on an idea that didn’t work? Well, through a combination of geeks and VCs. Geeks (such as yours truly) played with Foursquare because we saw the potential and we like to be at the head of trends like these so we became adopters even though we didn’t see immediate value. Unfortunately, we lose interest after a while and everyday people never gained interest. VCs also saw the potential and funded the crap out of Foursquare. That allows them to grow, brand, make mergers and basically run like a big profitable company even without being big or profitable. In the short term the lack of revenue is overlooked in the interest of the potential, but before long you’re without money and VCs aren’t willing to put bad money after good.
What does this mean for the industry? Well, mostly it means that its riskier than most industries (which we already knew). Companies as big as Foursquare with as much funding as they have though, may well indicate a bubble. There are a lot of people getting involved in the industry that don’t understand the risk. The market is sizing itself based on their infused money and if/when they notice the risk and pull their money out we’re going to have a very loud pop.