Following Facebook's IPO we declared a bubble burst and now we're seeing that hit the start-up ecosystem as investor money becomes harder to find. "The frothy bubble is over," an analyst told The Wall Street Journal's Pui Wing Tam and Amir Efrati. And that defrothing has happened in large part because of Facebook's performance over the last three months. It's not just the social network's stock that has failed to boom in the months following its public offering, fledgling tech companies are now having a hard time raising money, as a result. Rather than just fork over the bucks to an up-and-coming app, investors have a new found curiosity in potential profitability and revenue. See: investors want to put money into companies that will bring mega riches. Before, users were enough to feed those fantasies. But Facebook's wimpy stock has since crushed that dream, making it harder for these other social media start-ups, to convince investors to buy in.
Until now, these nascent companies could attract dollars based on their popularity, rather than profitability, as we discussed a few months ago. Facebook was the shining exemplar of that model. That is, before its public days. The company brings in lots in ad revenue ($992 million at last count), but it got such a big ($100 billion) valuation based on its large, engaged user base. Those people not only were eyes for standard web-ads, but Facebook also promised a better, more personalized form of advertising. The social network has yet to prove it can deliver on that—engagement is falling, likes don't always work, and the company has yet to really show its advertising works better than a regular website. This has ultimately hurt its bottom line, causing its stock to stall around the $20 mark for the past month of so and leading to slashed projections for ad revenue in the next year.
Now that the financial world has seen the kind of returns that result in that sort of investment, the money holders want proof that other tech start-ups have long-term revenue plans. Unable to do that, companies like Doximity, a social network for doctors, are having a hard time securing dollars. "I underestimated how tough this round would be," Doximity CEO Jeff Tangney told WSJ, describing how he has had trouble getting late stage funding. "In hindsight, I should have raised earlier in the year because that's when the market was hot." Until now, these start-ups could point to Facebook as a paradigm for success. Now, the association with the social media star might actually hurt their chances.
This is just one of the few signs we have seen of Facebook's cooling effect on the market. About a month after the company went public, prominent Silicon Valley investor Paul Graham predicted this would happen. "The industry probably won't implode, he explains. But the overall message is: Don't expect the money to be there," he wrote. Fred Wilson, another venture capitalist, agreed, pointing to this particular late stage funding debacle. "Facebook's IPO performance (or lack thereof) has the potential to impact valuations in startup land. I think it will be particularly impactful on the late stage and secondary markets where most of the IPO valuation speculation is happening," he wrote. Meanwhile, other tech IPOs have languished, only hurting the chances of these start-ups more.
Not all hope is lost, however. The more viable ideas—Twitter, Square—are still attracting investors. And then there is also that other path to success. Like Instagram, getting bought out by a big tech company may offer more hope than trying to raise money the old fashioned VC way, at this point.