Why Foursquare and Twitter Are Worth Less

According to several sources, Foursquare, the social location app company, raised $45 million, as its valuation fell by nearly 50% from its peak of $650 million. Its ad-supported business model has stumbled. Its troubles are not unlike those of Twitter Inc. (NYSE: TWTR), which has been unable to sell its model of bit-sized messages to the advertising business either. Twitter had a share price of over $60 less than two years ago. The stock has fallen to $19. New management has bumbled in finding a way to drag Twitter back to what was once a position of promise.

New media has started to be valued like old media, at least among the weakest companies in the new media group. Advertising has been one of, if not the most important of, the ways that companies like Tribune Publishing Co. (NYSE: TPUB) and Yahoo! Inc. (NASDAQ: YHOO) are evaluated by Wall Street. The benchmark now applies to Foursquare as well.

Another angle from which to look at the troubles of weak new media companies is at the most successful one, which is Facebook Inc. (NASDAQ: FB). After a period during which there was concern whether Facebook could create a strong advertising model, particularly on mobile, it has blown those worries away. Back in 2012, when GM pulled ads from Facebook because it said its marketing message money was wasted on the social network, some observers concluded that Facebook would flounder. But Facebook’s success since has become a yardstick that shows just how high the bar is for other social media start-ups.
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Only three or four years ago, investors believed that if entrepreneurs started social media businesses with tens, and perhaps hundreds, of millions of users then advertising would come. Nothing about that assumption has proved true.

Foursquare is as dead as a doornail if it cannot quickly pull in revenue to demonstrate its model, show rapid sales growth and prove it can be profitable. The questions about this are little different from those that dogged old media as it moved into the digital age.