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.