Gowalla/ Facebook deal: welcome to 2003, 1999 is over

Most of the chatter about the Gowalla and Facebook deal was about the investors and whether the founders screwed over the investors or not (to make a long story short, Arrington thinks they did but Jason Calacanis (an actual investor) think they didn’t. the End). In my humble opinion, it doesn’t matter. It’s nothing more than Silicon Valley gossip. What really matters is this deal impact on the future of the location base services space (LBS) and consumer apps in general: The number 2 player in the LBS space got picked up for what’s considered in the valley to be pocket money? What does it mean for the 100s of LBS/consumer apps that are competing over the limited consumer attention?

Let’s start with some numbers: Based on CrunchBase, Gowalla received a total funding of 10.4M. Given the fact that investors tend to own preferred stock (that has priority over employees and founders that typically own common stock) and the fact that Gowalla’s investors admitted that they were not made whole, we can assume that the founders (and the investors that approved the deal), valued the company at a low double digit valuation. This is not uncommon: Investors often get nothing in return to an investment so getting some of their money back is not the worst outcome in the world. What’s striking is that this is what the number 2 in the LBS market worth. 

You see, until last week, the LBS market was red hot. Research firms estimated a market size of 2.8B in 2010, growing to be 10B by 2015. (BTW, the full report will cost you almost $4,000- still want to buy it?) Foursquare, a leader in this space, was valued at 600M less than 6 months ago. In this red hot market, Gowalla was always considered as number 2, loved by its users and reasonably successful but the Facebook deal raises real question marks over the short term prospects of this market and the hype around it.

What does it mean to VCs and entrepreneurs in this space?

  • OMG- a plan that had 2M users for a free app would have been the dream of any entrepreneur and investor. Many checks were written for companies aiming at this level of “success”. VCs are quick to learn and I don’t assume it will be remotely as easy to get a check for an LBS company anytime soon.
  • OMG- in a space where success means winning over the market before you can generate any meaningful revenue, you have to be number one to stand a chance. You can’t be a Living Social, number 2 to Groupon yet a huge money making machine. You can’t aim at the moon and hope to get to the stars. Gowalla proved that the reaching the stars in this space means nothing. 
  • OMG- entrepreneurs will be asked to come up with monetization stratégies that don’t rely on network effect. In other words, welcome to 2003, 1999 is over. 
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Gowalla/ Facebook deal: welcome to 2003, 1999 is over

6 thoughts on “Gowalla/ Facebook deal: welcome to 2003, 1999 is over

  1. Not sure I agree that Gowalla held the second position in the location based service race. It had some swagger back in 2010 leading up to and during SXSW but never really gained anything that resembled meaningful traction. Foursquare continuously cleaned their clock for mindshare and users.

    Location based services will continue to flourish as we are still in the early innings of the game with less than 10% of the population having adopted LBS. I think the check-in game is likely over as Yelp (still kind of a big deal), Foursquare, Facebook and even LevelUp seemed to looked things up. We might see Google make a run within the G+ platform once Zagat is fully integrated but there isn’t much room left for competition as local establishments can only deal with so many check in, mayor, duke and other reward type promotions.

    LBS in my mind is a much broader market. I look at applications like the Starbucks app which tells me where the nearest stores are, what features they have and whether they are open or not and see a ton of value still to be surfaced using location.

    There is still a huge amount of opportunity available in the areas of discovery, evaluation and decision assistance, analytics, guidance, commerce and even the social element of the location space. What we are seeing now is just the first ebb in the ongoing flow of innovation.

    1. Mike

      I agree with you completely. My point is not that the LBS market die or dying, but that it was way overheated. Being number 2 or not, Gowalla was a significant player in the market and got some real user base (2M is not a tiny number). Seeing Alfred goes today as well (most probably for not much more) makes me think that founders need to revise the way they think about their business plans. It is no longer “if we get enough eyeballs we can rule the world” kind of game.

  2. I agree completely. The eyeballs model only works at massive scale. The challenge is many innovations, like what you and I have created in the past, are needed in the market place but there is no way of knowing what will scale large enough. If we as entrepreneurs and innovators only focus on predictable business models we might miss creating the next big thing.

  3. Gadi,

    Great post. As someone that has run a geo-aware startup, I value your opinion on this space immensely. And I think you are right, we were/are headed toward somewhat of a bubble similar to the early 2000s (although much smaller and much more confined).

    Mike makes some good points — namely, Gowalla had lost some of it’s mojo over the last year and I think part of that was because Josh Williams was never about conquering the world. To be honest, knowing Josh enough to be dangerous, I think he was a purist that happened to put a great app together but he wasn’t willing to do some of the things that would have made him more money but didn’t align with his original vision of the platform.

    To that last point, I believe that Gowalla got to a point (especially after their most recent tack in a different direction) where they were going to run out of money. At that point, Josh and Scott needed to either shutter the business or sell it to someone. Given the fact that they were able to make some money, pay back their investors (albeit pennies on the dollar) and ultimately get cool jobs at Facebook, I’d say they did okay.

    Back to your original point, however, LBS start ups not named foursquare may not cut it down the stretch. Like Mike said, people are using these services for more pragmatic and intuitive uses like finding coffee locations and cashing in on deals on Black Friday. There will be lots of smart applications that tap into the power of social but just like Facebook has won the war of the social graph, I’m not sure anyone is going to unseat foursquare (and Twitter and Facebook) for top position when it comes to check-in services.

    Best,
    Aaron | @aaronstrout

    1. Thanks Aaron. This is super insightful. It’s a great “insider” POV to the process of making such a decision and your knowledge of Josh makes it even more interesting. I agree that location will be an enabler of almost everything mobile in the future but it is turning into a mandatory feature vs. being a killer app which is what some thought it was couple of years ago.

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