It looks like Facebook’s post-IPO share price tumble might end up affecting valuations throughout Silicon Valley. Paul Graham, the influential founder of the Y-Combinator startup incubator, sent a rather ominous email to his stable of portfolio companies warning them that “bad times” might be up ahead.
Here’s what he told his portfolio of startups…
If it means new startups raise their first money on worse terms than they would have a few months ago, that's not the end of the world, because by historical standards valuations had been high. Airbnb and Dropbox prove you can raise money at a fraction of recent valuations and do just fine. What I do worry about is (a) it may be harder to raise money at all, regardless of price and (b) that companies that previously raised money at high valuations will now face "down rounds," which can be damaging.
In other words, we can likely expect to see fewer eye-popping valuations for companies of questionable revenue generating abilities.
He adds:
If you raised money in an equity round at a high valuation, you may find that if you need money you can only get it at a lower one. Which is bad, because "down rounds" not only dilute you horribly, but make you seem and perhaps even feel like damaged goods.
On one hand, I am empathetic to any companies that may end up experiencing this, because they are forced to face the consequences of a deflating funding bubble that they don’t have any control over. And it isn’t like budding companies turn down money because they think investors are overvaluing them. There’s no real incentive to doing that and, as a founder, you have to believe that you’re going to continue building and growing value in your business.
So, what does Mr. Graham advise his portfolio of companies to do?
The best solution is not to need money. The less you need investor money, (a) the more investors like you, in all markets, and (b) the less you're harmed by bad markets.
In other words, continuously raising money should not be the goal for young companies - the goal for startups should be to create revenue generating, high growth companies with clear paths to profitability.
I’m probably getting ahead of myself here, but I think the weakness of Facebook’s public markets performance could end up being a good thing for Silicon Valley. Maybe it’ll force companies to drive growth in revenue and profitability instead of growth in users and clicks. Personally, and I’m sure I’m not alone here, I think there’s been a major over-allocation of money and human capital to “companies” of questionable value. Maybe this will separate the wheat from the chaffe.
On a total side note, how completely ridiculous are the comments on Business Insider? I mean, I love crazy internet comments more than most, but BI seems to attract the crazies. For instance, someone who goes by “ObaMao” had this gem:
Say it ain't so with Fadebook announcing today that they're SO desperate for users that they're going after little kids albeit with adult supervision? Yeah mine field full of pedophiles lurking... Fakeboom may just turn out to be ahem another social media bubble. Myspace anyone?
Anyway, what do you guys think? Is this a true sign of a deflating bubble or am I simply over-prognosticating?
That people are wondering about this makes me seriously question humanity.
30.5% lost in a matter of what, 2 weeks?
Buy at 10.
It's still overrated being a $56B company.
I mean how much revenue did Facebook have... like one billion? What do you expect from the market if its market cap was at 100B. How is it even going to grow? Everyone is already on facebook and competition will only increase. Can they drastically change their business model?
It's funny because in my industry, these valuations of over 100x multiples exist, but are sustainable when companies are 'successful'. This is only because we have valuations in existing, potential revenue generating candidates.
Facebook on the other hand, has nothing tangible about their model, which people can't seem to price in effectively. Although intangibles have been a significant part of company valuation the past decade, you still need to justify these lofty multiples with expected growth rates. "Ok, you're valued at
Hey guys, sorry about the post issues. My blog got screwed up when it was first posted, but it's all there now. Sorry for any confusion.
As for some of the comments. I think Facebook has real paths to growth via commerce applications. They already make 30% of all social gaming transactions. I could see e-commerce applications running through facebook. i.e.) you go to the Allen Edmonds page, see a photo of a pair of shoes you like, and buy it right then and there. Just some random ideas, but I think there is a ton of potential on the commerce side of things.
I'd wait a little bit more before making a conclusion about what really happened because, as of now, there are other macro issues that are factored in...
I kinda had the same knee-jerk reaction about the postponed IPOs (like Kayak) that everyone else had. Now I'm hearing that Kayak's CFO resigned and that their main source of pricing data was just acquired by Google (at best increasing their COGS dramatically and worst case gutting the company). So Facebook was a bit of a convenient scapegoat, in their case anyway.
Nice post, King, and I love the photo. Reminds me of what I'm gonna look like in Spain in a few weeks.
Eddie -
Google bought ITA Software, which is essentially the backbone to all of the flight booking sites, just without the user-friendly GUI. I'm curious to see what Google really does with it, since I'd imagine there could be some anti-trust issues, assuming that Google used it to put ITA flight results at the top of their search results or what not. Sort of in the same vein as the anti-trust issues Microsoft faced for bundling IE with Windows.
I'd be surprised if they did anything more aggressive than arm's length involvement with ITA. In other words, I expect them to re-sell the data to sites like Kayak at a premium. Anything more in-house and they're courting anti-trust bullshit like you said.
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