11th April 2013 Update – Foursquare have finally announced a $41m round of debt and/or convertible debt. Union Square Ventures’ Fred Wilson has blogged about the round. 

Keith Rabois appears to be enjoying his birthday. After a Twitter tête-à-tête with Foursquare founder/CEO Dennis Crowley (which was amusingly misreported by Business Insider as “Square-bashing”), Rabois referred to “another down round” (emphasis mine) at Foursquare, which intrigued me, so I asked the obvious question:

Rumours have been circulating since last November that Foursquare was struggling to find investors willing to accept a pre-valuation of “between $700 million and 800 million“. At the time, Crowley claimed he was looking forward to confounding Rabois’ skepticism about Foursquare but Rabois’ single word answer implies that the Series D is done and at a valuation below that of the Series C (which was rumoured to be $600m).

Despite having raised $71.4m to date and attracting millions of users, Foursquare has struggled to come up with a revenue model that justifies such a lofty valuation. I’d have expected it to be challenging Yelp and Groupon by leveraging its userbase to build a revenue stream based on charging businesses for advertising to prospective customers but it seems to have passed up on this opportunity, even in the highly competitive spa and massage sector:

Instead, the company has focused on generating revenue via partnerships with credit card companies. It recently announced deals with Visa and Mastercard to provide cardholders with discounts when they check in and shop at participating merchants. However, competition from companies like Square and Birdback and the prospect of a decline in the importance of payment cards as new payment technologies gain traction raises questions over the value of such deals.

Since the aforementioned Series C round in June 2011, Groupon, Zynga and Facebook have floated and fallen. Some pundits were already predicting that Foursquare would fail by the end of 2013 but a new round of investment should eliminate that risk. However, a down round will put immense pressure on Crowley to deliver the revenues required to begin generating positive cash-flow and improve the prospects of a profitable exit for investors.

If the round is done, we should see confirmation in the form of an SEC filing (like this one) within the next few weeks, although such filings don’t reveal at what share price or valuation an investment is made. Given the circumstances, I’d be surprised if the round was more than $15m in size. Once it’s been announced, I expect we’ll see a flurry of activity from Foursquare as Crowley and his team start chasing revenues with the sort of urgency a ticking clock incites.