Despite protests to the contrary, it would be best if Foursquare were to be sold. Conflicting reports have surfaced: (1) the company is about to raise a second venture round at a rumored post-money valuation of $100 million; (2) the company is about to sell to Yahoo! at a rumored valuation of $100 million. Let’s throw emotion to the wind, and let’s consider the issue using a colder and more practical analysis than that we use when we prefer Foursquare over Gowalla and Yelp. Because the issue is serious. What venture capital needs more than anything these days is successful exits. What entrepreneurs will always need is venture capital. Without successful exits, both of these groups are in trouble.
New reports published by PricewaterhouseCoopers and the National Venture Capital Association show that venture activity in the first quarter of 2010 has fallen from the previous quarter’s levels, already low, and is not – in the grander scheme – all that much more robust than when the bottom fell out in the same quarter last year. Volumes are now more or less in the vicinity of the early- to mid-90′s, which is to say, in the vicinity of an era when venture capital as we have come to know it did not exist. Perhaps this way of putting it borders on the dramatic, but the point remains: Venture capital needs a lift.
The clock, in the meanwhile, has not for a single moment stopped to tick. Even at this very moment: hear it? (Of course not, it’s digital, I’m only saying…) While it is common in venture capital to discuss a given investment opportunity in terms of its X-factor upside – for example, 5-times or 10-times or 20-times the initial capital invested – this swashbuckling manner of speaking disguises a fundamental variable in the investment return calculation: the time-value of money.
A “10-times return on investment” (fine print: realized in ten years) is actually not as spectacular as it may seem when phrased in that bombastic way. Let alone a 5-times return, or no return at all. And while we are on the subject of exit value, one other concern is worth repeating. I have described in this column before what I believe may be a forthcoming “exit bubble.” The spike of fundraising that occurred in the 2005-2007 timeframe will arrive at its wind-down mode approximately next year, or the year after, or now. As this occurs, there should be an increase in sell-side supply in the M&A and IPO markets, and such a pattern is unlikely to prop up valuations (generally speaking).
I realize that, should Foursquare be acquired – especially by a company with a spotty record of strategic M&A – there is a risk of the service in time disappearing. For fans of the service, like myself, this would be unfortunate. For entrepreneurs and their supporters, this would be dispiriting. For venture capitalists, it very much would not matter – as it did not matter much that Netscape vanished from the map soon after becoming a venture capital success story. Despite occasional protests to the contrary, entrepreneurs need venture capital. And venture capital needs exits to survive. Now more than ever.
