Why Local Is So Damn Hard For Startups: Foursquare Borrows $41M To Try Again

curtwoodward writes "It's one of the biggest, scariest graveyards for Internet entrepreneurs: Small, local business. Sure, a few companies have gone public trying to harvest this huge market — Groupon and Yelp, for instance — but even those big names aren't anyone's idea of a knockout corporate success story. Consider Foursquare, the 'check-in here' smartphone app that leads the latest wave of dreamers trying to strike paydirt among the mom-and-pop set. The company has now raised more than $100 million in private investment, including a fresh $41 million loan. It's just started trying to make money. And the CEO acknowledges that it'll take a massive new product overhaul to get there. Google's tried this market too, with nothing to really show for it. Same with Facebook. If these deep-pocketed techies can't crack the local business advertising nut, is there any hope for Foursquare — not to mention the countless smaller startups?"

Comments

Small business don't advertise that much

[White Flame]

Many small business which are suppliers establish themselves already having a customer base from their prior life. Word of mouth is best for small local businesses. Sure, some advertising is often necessary, but many of them also know that they don't have the infrastructure or manpower to handle a large customer influx.

Plus, many small businesses run on tight margins and just barely pay for themselves, if they're lucky. Trying to make it big selling advertising to small businesses is like trying to bleed a turnip.

Re:Small business don't advertise that much

[White Flame]

Case in point, from TFA:

"Businessweek also reported that today, the business brings in about $2 million in annual revenue.

That’s not chump change, especially if you consider Foursquare’s assertions that it hasn’t spent any money on advertising, has a tiny sales staff, and actually blocks some big accounts from buying ads on its service"

Re:Small business don't advertise that much

[Bieeanda]

I really wish I had mod points, because White Flame hits the nail right on the head. Small local businesses need the Internet like a fish needs a bicycle. A blogspot page for events, maybe a simple '90s style page to show off bits of inventory and provide contact information, and that's really all they need at most.

Re:Small business don't advertise that much

[wolrahnaes]

I can't agree. More times than I can count I've had a question about a local business which I've tried to find an answer to on their web site, something like what their hours are or often restaurant menus, but searching their name only results in a listing on one of the many useless yellow pages type sites. Many of my customers are small one or two person businesses, they'll tell me their email address and it's some random @aol or @hotmail which was clearly their personal account long before the business. It's entirely unprofessional these days to have absolutely zero internet presence and puts them in a position of having an uphill battle for me to respect them as a business.

It's not rocket science to have a domain with email and a basic web site. It's trivial to get a domain and the absolute minimum level of hosting required for such things, why people consider it acceptable to not do this I can't understand.

sounds more like they have too much money

[ThorGod]

Their idea doesn't sound like it requires 100M to get going off the ground. It also doesn't sound like it'd ever raise 100M all that quickly.

Privacy

[nairnr]

Everything seems like a good idea until you actually get to do it, especially when it comes to the next social wave. I think people are reconsidering what it means to be on social media, and what the companies get from you using the service. Most importantly, it is the commoditzation of yourself as data points. In the end, these companies are raising gobs of money on the prospect that they can turn you or your information into revenue for them. Free services are not free, they have a cost - hidden or not- to you as a consumer.

There are so many bubbles of tech companies trying to be the next big thing, people trying it our, and then getting bored with it. With so much money invested, how could they possibly get such a return on it?

Small Markets

[Archangel Michael]

are small. For a reason.

There are basically two types of Mom and Pop (aka Local) stores, those barely surviving on what they are doing, and those doing very well and don't need more help.

Which of these are these apps targeting?

As someone living...

[Lordfly]

...in a mitten-shaped flyover state, I think part of the problem might be that these businesses don't realize that most of the US doesn't look like LA, San Fran, or New York City. Therefore their idea of useful or exciting really isn't to someone living in Herpaderp Iowa, population 4,354. Maybe if they tooled their services to be a little more useful to people who can't just hop on the subway to the latest gastropub, they'd be a bit more successful.

Re:As someone living...

[DerekLyons]

Not just that... but even in the bigger metro areas they also need to be useful for people who aren't hipsters looking for the latest gastropub or trendy cuisine hotspot. We've had bad results with Yelp and Urbanspoon, and always thought that was because we weren't in a big/dense metro area - until two weeks ago when we spent a weekend in downtown Seattle... and they were *still* pretty much useless because we aren't in the hipster demographic.

Local vs. global

[Todd Knarr]

The Internet's good for global reach. But someplace like Rudford's? If you don't live in the area, you probably aren't going to make a trip to San Diego just to eat there and they aren't really interested in paying to make you aware they exist. And the whole checkin thing fails when it trips over the simple fact that it mainly tells me where my friends are at and if they're at Rudford's I probably already know because they pinged me asking if I was interested in dinner.

So what exactly does Foursquare bring to me? Not much. And since I'm the product it's selling to advertisers, if it's not bringing anything to me then why would I be showing up there to be sold?

Re:Local vs. global

[Todd Knarr]

Local, remember? If I'm checking in at a place, they don't need to offer coupons to get me in. I'm already going there and know them. If they want to distribute electronically to repeat customers, all they need's a mailing list and a server to send the e-mail through. To attract new business they need to get the offers to the people who live in the area who aren't checking in. Except those people probably already know about the place from driving past it every day, right?

Now, a non-social search site would work, someplace where I can search for businesses in my area with locality-specific information about them. But that's hard because the cost of acquiring that information's high (these are businesses you can't find much out about on-line, to get the info to populate the database you pretty much need actual people wandering around taking notes) and the target audience is small. Hence why Foursquare's having so many problems with generating revenue.

Yelp is fine

[rwa2]

Groupon is a pyramid scheme that isn't really sustainable.

I want to like Foursquare, but never really tried it because it sounds too social.

Yelp was great when it was included by default on Google Maps. Even if the reviews were inconsistent, I got great results from them.

I've been somewhat pissed since Google Maps Mobile started using Zagat. For their restaurant recommendations, Zagat puts way too much emphasis on appearance and 'chic', and not enough on food quality and novelty. So maybe they're a little more consistent, but I find myself having to consciously filter their ratings, like subtracting 5 points for Thai and Chinese and mainstream American, and adding a few points for any kind of obscure ethnic hole-in-the-wall.

"Local" and "social" - FAIL

[Animats]

Basic truth: neither "social" nor "local" makes big money. Users, yes; profits, not so much. Compare Facebook's profits with Google, or Microsoft, or HP, or ... And Facebook is considered a winner in "social". Failures include AOL, Geocities, Myspace, Orkut, and Google's various tries.

As for "local", Yahoo was the original "local" directory service. Where are they now? There's "local.com". Does anybody use "local.com"? Yelp is probably the leader, but loses money. If you're the industry leader for several years and are still losing money, your business model is fundamentally flawed.

If there's a winner at "local", it's going to be somebody in the phone space.

Parent poster just summed it all up!

[King_TJ]

The more I get successful businesspeople to tell me the story of how they got started, the more I hear that common theme. Advertising and marketing is pretty much *useless* for the small business. It simply doesn't make any sense to divert funds to it that are so desperately needed at that stage just to tread water.

Word of mouth is by FAR the most successful thing the small business owner can use effectively to grow the company. PROVE you're valuable by pleasing someone who actually wants/needs what you're trying to offer. Ask them if they'd be kind enough to refer you to to the people they know. (A surprising number of happy customers will do your "advertising" work for you at no cost to you at all. People like to feel like experts about things, including having an answer when their cousin or buddy mentions he/she sure would like to find a good source for "fill in blank".)

For someone just starting out, I'd even say they should scrap ANY kind of advertising idea that costs them more than $50 or so at a time. Print up a bunch of cheap business cards, perhaps, or make your own flyers and strategically mail them out to locations that make sense. But otherwise, invest in things that make your business better at doing whatever it does. If it fails and you have inventory or computer hardware or furniture or whatever -- at least those items have some resale value or can be reused for another business plan. The money you poured into someone's 30 second radio spots or billboards or signs on benches at the bus stop? It's just spent and gone.

Re:Parent poster just summed it all up!

[bhcompy]

I don't wholly agree. Traditional advertising is bad(web ads, tv, some radio). Local advertising(signage, newspapers, some radio) can be useful for certain local products(a paintball store, for instance, not someone doing web dev).

And more than anything else, if there are trade shows for your target demographic, spend the money to go and put up an exhibit. Over the first 10 years the software company I work for(60 people, a small business) existed the vast majority of sales started or closed at trade shows for the target industry(public safety). Trade shows are expensive to attend as an attendee, and even more costly as an exhibitor, but they work very well because your entire audience is your target demographic.

Time

[ubersoldat2k7]

I work creating new products to try to break this market and our biggest resistance is time. Most small business owners don't have the time to learn your tool, learn your business model or to care. They're not going into your HTML5 dashboard where you show them visits, spending rates, high traffic windows, etc. They're not going to download your app because they might not even have a smartphone and if they do, probably, don't know how to install apps.
They're not going to go through the process (as Foursquare is experiencing) of registering their business just to get some hate feedback and loose the little customers they have left.
Also, any normal small shop can have 2-3 visits a day from providers and commercials trying to sell them stuff. So you're simply another guy trying to reach into their rather limited margins and there's no MBA that can break that.

Facebook, Twitter, Paypal: the small biz trifecta.

[conspirator23]

If I'm a small entrepeneur, these three give me platforms for advertising, promotion, and e-commerce with optional "social interaction" channels built in. I'm probably already an experienced user with all of these systems, and I can safely assume that the overwhelming majority of my current and future customers know these systems as well. How much time and money do I need to invest up front in order to exploit these tools? Zero. Zip. Nada.

Anybody who wants to deliberately insert a $$ product or service into this space is going to have to identify a gap in the current ecosystem that is painful enough that the entrepeneur will happilly throw the money at them. I don't see Foursquare doing anything right now that meets those crieria. They might have something interesting in mind but we'll just have to see.

Yelp?

[CohibaVancouver]

If I was a small business owner, the issue I'd have with advertising on Yelp! is the fact that I'm giving money to an organization that might post bad reviews of my establishment tomorrow.

[Insert frothing-at-the-mouth posts about Yelp! being corrupt and taking down bad reviews for customers who pay. All done? Good.]

Couple cases in point:

There's a little Thai joint in my 'hood that I quite like. There are negative reviews (along with my positive reviews). Why would he advertise on Yelp!?

I'm involved in the management of a little rustic resort - It has one review on Tripadvisor posted by a couple of wingnuts who smashed up and almost burned down a cottage. Why would I buy an ad on Tripadvistor?

Here's how to get small biz to like you:

[Anonymous Coward]

Stop frickin' calling me while I'm working. My phone is not here for you to tell me how sweet your search engine optimization service is, or how I can attract lots more customers if I give away my product for a quarter of its value. My phone is to service my customer. If I need your help, I'll find you. Leave me the hell alone and let me work and take care of my customers.

And stay off my lawn.

Re:Word of Mouth

[Jane Q. Public]

"First of all, I think anyone wanting to start a business needs to go into it with a solid chunk of funding knowing full well that they'll burn money for a couple of years."

In most cases I would agree with that only if it is YOUR OWN funding, not borrowed money. DHH (if you know who he is) watches the tech industry closely and he has said it many times: the FIRST and often fatal big mistake many small companies make is going straight into heavy debt to finance their startup.

Internet Graveyard is littered with ...

[Taco Cowboy]

It's one of the biggest, scariest graveyards for Internet entrepreneurs: Small, local business

Not true

Internet graveyard is littered with businesses that does *NOT* make any sense

Most people have a misconception of how to do business online --- they often thought that Internet is a world of its own, that it has rules so special that online business must act differently than their brick-and-mortar counterparts

I'm talking from my own experience --- I had been in the Silicon Valley since the late 1970's and I had involved myself with several very very successful startups

Although my portfolio did include several failed projects, the majority of the projects that I involved with were successful --- simply because of common sense ---

Any business, no matter if they are online or in the brick and mortar form, must have at least one product that others need

And if the demand is great enough, others will actually PAY YOU to get that product --- and that's where you get your profit

No matter if it's google or youtube or facebook or foursquare or groupon --- as an investor (and an entrepreneur) you need to look at the project as a customer ... and ask yourself "Is there anything that I desperately need from them?"

If the answer is "Yes", I will pour my money in

If the answer is negative, or maybe, or not sure, or whatever, I won't waste my time with it no more

I can use my time better by looking around for other startup ideas --- and there _are_ a lot to choose from