How to grow a social media business based on location, from one location to global?

It's called "empty restaurant syndrome" and isn't restricted to location based services. Check out http://blog.stackoverflow.com/2010/07/area-51-asking-the-first-questions/ where it's discussed about question and answer sites like /answers.onstartups.com.

"Do we launch and try to hit a group of specific users in a small location to get them using it and hope it spreads from that location?"

This sounds like a good idea for several reasons. It lets you experiment with a pilot and see what works and what doesn't. Once you figure things out in a small area, you can then launch on a larger scale based on the lessons you've learned.

I am working on a similar start up. I have been advised to get funding and go north east all at once.

However, my gut is telling me to start small listen to my users and they will do the talking for me. I think that if you hit a specific group of users in a city(NY, LA, Boston) and they like it... it will spread.

I wouldn't advise global from the start.