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 The financing of Foursquare Labs Inc. -- a New York mobile social networking startup that just raised $1.35 million from Union Square Ventures, O'Reilly AlphaTech Ventures and a handful of unnamed angels -- has turned into a fascinating case study of the interplay between venture capitalists and the startups they back. It also may contain some lessons on the impact of making the relationship public. Foursquare mixes social, location and gaming elements to encourage people to explore their environs. It was co-founded by Dennis Crowley, who founded a similar service in Dodgeball.com, which was acquired by Google Inc. (NASDAQ:GOOG) in 2005 and later deadpooled by the search giant. Launched in March, Foursquare was something of a sleeper, but the world -- or at least the bi-coastal tech startup world -- woke up to the service in mid-July, thanks initially to a detailed blog post called Why Yelp (...and Every Single Retail Establishment) Should Support Foursquare. It was written by Charlie O'Donnell, the co-founder of career development site Path101.com who also founded the nextNY grass-roots organization of tech up-and-comers. Previously, he served as an analyst at Union Square. Blogged O'Donnell: Foursquare is the missing link, enabling you to come full circle from a review or recommendation to an in person visit from a real customer. Best of all, it has figured out a compelling reason to get you to submit that data--in the form of a fun game you play with your friends. The next day, Union Square co-founder Fred Wilson used O'Donnell's post as a jumping-off point for his own analysis of Foursquare on his A VC blog, which is practically required reading for tech entrepreneurs and investors. That post by Wilson, in which he revealed his "crush" on Foursquare (as Business Insider's Dan Frommer later called it), turned the service into an overnight sensation. Over the next several weeks, the attention Wilson and others gave the service quickly made Foursquare's financing into "among the most competitive early round financings I've seen in a long time with a bunch of term sheets offered and even more people trying to get into it once the deal was cooked," blogged Wilson on Saturday, after news of the round had leaked on Friday. "To be honest this transaction tested my belief that blogging about stuff you are interested in is a good thing," wrote Wilson, continuing: There are many people in the investment business that believe you have to play your cards close to your vest or you'll get burned. And I understand that approach. And there was certainly a few times during this transaction when I regretted how public we were with our interest in Foursquare. But as my partner Albert [Wenger, who has joined Foursquare's board] reminded me during one of those "head in hand" moments, we did a lot more good than harm by doing that. First we put our investment thesis out there and got feedback from a lot of people on it. Second, the company appreciated our strong early endorsement of their service long before we had even offered to invest. Third, we saw the market develop around the deal as most interested parties contacted us at one time or another. And most importantly, now that we are investors we have a good sense of what the company is doing, what they need to do, and how we can help. For Foursquare, the attention proved challenging, too. With many a tech reporter on the trail for any hint about the deal, it was likely the SEC filing would be tracked and published before the planned announcement Tuesday. While we were migrating to a new database and switching domain names (did you notice we grabbed foursquare.com? :), the news of our financing leaked out and crushed us. Over the past few weeks, we've been quietly re-writing a lot of our server architecture in an effort to prevent crashes like this from happening in the future and to make our platform much more flexible for adding new features / game mechanics / badges, etc. The financing allowed us to bring on Harry [Heymann, who ran Dodgeball at Google] about a month ago, and with any luck, we'll be bringing on a fourth soon.
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