BusinessWeek broke the news of the Series D funding round early on Thursday, an article that was quickly followed by a post from founder Dennis Crowley on the official Foursquare blog — entitled “Continuing Foursquare’s Growth” — and posts from two separate partners at one of the company’s main financial backers, New York-based Union Square Ventures.

Crowley compares the challenges to Google

In his post, Foursquare founder and CEO Crowley describes the challenges ahead — including some fairly dramatic technical challenges, such as the need to index and filter more than 3.5 billion check-ins and other location data in something approaching real time, in order to successfully recommend to users a restaurant or other business that fits their needs. Crowley compares it to the kind of data wrangling that Google has to do in order to provide search results:

“To us, this is like when Google came and revolutionized web search. Suddenly, you could find things on the internet. The real world is the same way. Four years ago when we started Foursquare, it was really hard to discover a new retro arcade that opened up on a side street, or to make sure you weren’t overlooking the best dish on the menu, or to know a good friend was just around the corner. Sometimes, we think of Foursquare as having the ability to give people superpowers for exploring the real world.”

In a post at the Union Square Ventures blog, Albert Wenger talked about the potential for Foursquare to capitalize on its new focus as a platform for discovering local businesses — something GigaOM’s Eliza Kern highlighted in her post on the newly redesigned Foursquare app, which launched on Wednesday. In effect, the company is going head-to-head with local recommendation services like Yelp, and giving up its earlier focus on “gamification” elements like mayorships and badges.

Debt instead of a lower valuation

Union Square Ventures partner Fred Wilson, meanwhile, wrote a post on his own blog about the fact that Foursquare chose to (or was forced to) use convertible debt rather than equity. As Wilson explains, this kind of late-stage debt issue is often used when a company doesn’t want to (or can’t) raise equity because doing so would involve a “down round” — in other words, raising money at a lower valuation than it was given in earlier rounds. As he described it:

“Both of our firms have been investors in Foursquare for several rounds and both of us own a meaningful stake in the company. Valuation is somewhat immaterial to us as our stake in the company is not going to increase much in this round of financing. But valuation is very material to the Foursquare management team because $41mm of capital is going to be dilutive at any valuation that would make sense here.”

As Foursquare has evolved from being a fresh young startup with the hot iPhone app — which it was in 2009, when it launched at the SxSW festival — into a four-year-old company that has raised a total of $70 million in three separate rounds, it has faced increasing pressure to prove that it has a real business, along with questions about whether it can ever justify its earlier valuation, which was in the $600 million range. In a report in January, private-company research firm PrivCo argued that Foursquare could go out of business by the end of the year unless it raised more money.

In a much-publicized spat on Twitter last month, investor Keith Rabois — a former PayPal founder who is a backer of Foursquare competitor Yelp — said Foursquare’s only option was to be acquired, because it had failed to back up its valuation with any real business success.

@dens @sriramk @hunterwalk great use of jargon. Maybe Hail Mary Bebo-style acquisition will bail you out.—
Keith Rabois (@rabois) March 16, 2013

Foursquare needs to prove it is a business

Foursquare’s biggest problem is that it hasn’t been able to generate any meaningful revenue from the millions of users and partnerships it has announced over the past couple of years — according to an anonymous source quoted in the BusinessWeek article, the company had revenue last year of just $2 million, which makes a $600-million valuation look almost ridiculous. According to Crowley, much of the new financing will be used to develop advertising products that can run next to Foursquare’s local recommendations.

Despite its inability to produce revenue, the company’s supporters remain optimistic about its chances of building a truly large-scale and profitable local recommendation service. Hunter Walk, a former YouTube staffer turned venture capitalist, said on Twitter “All I know is the financing allows them to continue building a product I love,” and Shai Goldman of the 500Startups angel fund said: “I hope they figure out how to monetize, I’m a fan.” Even John Lilly of Greylock Partners, which didn’t invest in the company, said on his blog that he thinks Foursquare has a chance to build a real business:

“What does matter is that they raised the money they need to give this a real go. I have high confidence in these guys that they’ll do well and build interesting products and a great business for a long time.”

Others, however, were less complimentary — and many seem to see Foursquare as a high-risk bet, much like email-offer flameout Groupon:

.@mdudas @jackgavigan @rabois @bijan I can only hope foursquare goes public. I didn't short Groupon nearly big enough.—
Rakesh Agrawal (@rakeshlobster) April 11, 2013

Post and thumbnail photo courtesy of Pinar Ozger

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• Hyperlocal: opportunities for publishers and developers
• Opportunities and challenges for mobile deals
• Facebook’s IPO filing: ideas and implications

According to the filing, the issuer would “need substantial additional capital to meet its  business and financial obligations beyond the next 12 months.” That sounds an awful lot like Clearwire, which recently raised new funds to get its LTE network off the ground and is strapped for operational capital.

UBS analyst John Hodulik said Dish management won’t confirm whether the investment is in Clearwire, but chairman Charlie Ergen did hint at the possibility at Dish’s second quarter analyst call. “Ergen reiterated that it would make sense for DISH to enter the wireless business with a partner that’s already in the space,” Hodulik said in a research note.

Why would Dish need the ailing Clearwire? Well, Dish claims it wants to become a mobile carrier, using recently acquired satellite spectrum to build an LTE network, access to which it would sell wholesale to other carriers and virtual operators. I have doubts that Dish truly intends to use that spectrum. It’s likely putting on a show for the FCC so it can get its satellite airwaves reclassified for terrestrial use, after which Dish would flip them for a quick and substantial profit.

But if Dish does plan to build a network, partnering with Clearwire would be logical step. Clearwire has the expertise and much of the infrastructure in place to host and run a future Dish network. It just doesn’t have the money.

Meanwhile, Ergen is trying to pressure on the FCC for permission to build a network. Currently the S-band frequencies Dish holds are allocated for “ancillary terrestrial” use, meaning it can only use LTE to offer supplemental capacity for a satellite broadband network – much like Sirius XM uses ground transmitters to boost its satellite signals in urban areas.

Dish wants the FCC to grant it a flat out waiver – much like it granted to LightSquared – to build a terrestrial only network, effectively turning its frequencies into a new cellular band. The FCC, however, wants to examine the satellite communications spectrum as a whole, deciding whether to permanently reallocate portions of it for mobile broadband. That means Dish will have to wait for the FCC to deliberate, and Ergen doesn’t want to wait.

At Dish’s earnings call, Ergen made the bold statement that Dish would launch a hybrid satellite-LTE service if it failed to get FCC permission for its 4G-only network, Light Reading reported. Ergen claimed that there is small market for satellite handsets that Dish could tap into, but that’s a bluff if I’ve heard one. Ancillary licenses like Dish’s have been around for years and no company has succeeded in making the hybrid model work. In fact, Dish bought its spectrum for two companies that went bankrupt trying to offer just such services.

Dish photo courtesy of (CC BY 2.0) Flickr user Dave Lindblom.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• A look back at mobile in Q1
• Who and what to watch in the new era of the living room
• 2012: Data, spectrum and the race to LTE

When Clearwire returned to the market for more funding in December, all existing shares were diluted. Sprint gave up the option to match any additional investment in order to maintain its same ownership position, and it appears to have done so up to a point. Clearwire raised $402.5 million form new investors, and Sprint kicked in $331.4 million, giving Clearwire the cash it needs to start its LTE network build.

By not matching the public offering completely, Sprint let its ownership fall well below 50 percent, which in turn allowed Sprint to reclaim the voting shares it surrendered to Clearwire last year. “Now that our economic interest has fallen below 50 percent, we are reclaiming our full voting rights so that our voting rights and economic rights are once again aligned,” Sprint spokesman Scott Sloat told Reuters.

By not having direct control over the company Sprint protects itself from Clearwire’s creditors if the company were to default on its debt, which is why Sprint surrendered its voting rights in the first place. While Sprint relies on Clearwire to power its current WiMAX service and supply additional LTE capacity in the future, Sprint is launching its own commercial LTE service this summer, while gradually phasing out its dependence on WiMAX.

Photo courtesy of Shutterstock user Susan Law Cain

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• CES 2012: a recap and analysis
• Updated: Forecast: global mobile subscribers, 2010-2015
• New solutions for the evolving mobile network

At 2 p.m. on Monday, LightSquared will be in violation of its debt terms and will be forced into default, unless it gets another extension from its creditors or files for bankruptcy protection. According to the Journal, lenders want Philip Falcone, whose hedge fund Harbinger Capital is LightSquared’s primary owner, to agree to several terms, including stepping aside to make way for an independent board, ceding a large ownership stake of the company, and assuming personal liability for a future bankruptcy. Falcone has apparently agreed to the first term, but has balked at the others, leaving LightSquared few other options but bankruptcy.

LightSquared attempted to build a nationwide LTE network using satellite spectrum, but failed to get the final green light from regulators after a firestorm of controversy broke out. The GPS industry and many government agencies claimed that LightSquared’s high-power terrestrial 4G network would interfere with millions of commercial, industrial and government GPS devices. LightSquared’s spectrum sits right alongside the global positioning system band.

Without a full terrestrial network waiver, LightSquared’s primary asset, its spectrum, is worth little, but satellite broadband analyst Tim Farrar thinks there may be one interested party: Dish. In his blog, Farrar wrote that Dish might seek to pair its own S-band satellite frequencies with LightSquared’s L-band, creating an LTE network that can span an enormous chunk of airwaves. To make the deal palatable to regulators, Farrar said, Dish likely would need to guarantee the part of the L-band near GPS would remain off limits. But even if it sacrificed those airwaves Dish could still double the size of the downlink capacity.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• A look back at mobile in Q1
• CES 2012: a recap and analysis
• Connected world: the consumer technology revolution

Shai figured his choices were few. He could: sell equity to raise money; take on a partner and change his b-model entirely (which he didn’t want to do because he “still believed” in it); sell out; or, shut it down. He sought out a mentor to help him choose.

And this is when his mentor tells him:

“Don’t be stupid. Borrow more. At $20,000 in debt, if your business model doesn’t work, you are in trouble. At $2,000,000, if your business doesn’t work, the bank is in trouble.”

I just love this advice. Shai says sit was one of the best bits of wisdom he received. Why? Because it helped him see his venture outside of the bounds of his own attachment to it. Think about it. Bankers are responsible for their decision to lend to you!. So, it’s not all about you. The sooner you stop personalizing things the easier your decisions, especially the very hard ones, will be.

What a great perspective to have.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.

• Can the daily deals business be saved?
• Content Farms: The Players, The Benefits, The Risks
• Social Media in the Enterprise