Facebook IPO Flop Is Bad News for Startups

Here we are in the aftermath of what was initially described as “the most spectacular IPO of a venture-backed company in the history of mankind” and no one — aside from the pre-IPO owners and investors, of course — seems happy. In fact, some are warning Facebook’s flop is sending negative shock waves throughout the investing community.

Paul Graham, the genius behind Y Combinator, one of the first startup incubators and the birthplace of immediately recognizable companies such as Reddit, Scribd, Disqus, Dropbox, Posterous, and many, many more, is worried, writes John Koetsier for VentureBeat. Referencing a letter Graham sent to companies currently in the YC startup program, Koetsier argues that Graham is worried the lackluster performance of the Facebook IPO has rattled investors, and that as a result, it may be much more difficult for startups to raise funding.

“The best solution is not to need money,” Graham’s letter states. “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.”

“For some of us in the technical world, it may be a little hard to imagine one IPO having so much of an impact,” writes Koetsier. “However, financiers and venture capitalists may look more at the pure financials of the situation, see major losses, and overreact…. And, realistically, if Paul Graham is worried — or if someone in the financial industry that he respects is worried — that’s a powerful warning. A warning for startups to be frugal with the cash they have.” Read Koetsier’s full article for more on why the Facebook IPO may be bad news for startups.

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For a counterargument, read Fred Wilson’s post on why Facebook IPO reactions are in need of a dose of perspective. And read this post from the OpenView Blog to learn more about what truly makes an IPO profitable or not.

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