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Comment by Alex3917 | Hacker News Reader

Out of curiosity, why is it that Facebook's IPO would hurt early stage valuations, when all of Facebook's early investors made hundreds of millions or billions of dollars? I could see it getting harder to IPO at a good valuation for a few years, but that shouldn't drive down early stage valuations all that much. Also, to me the most interesting thing to watch (beyond Spain) is these new crowdsourcing laws going into effect January 1st. That has the potential to drive hundreds of millions of dollars into the angel space overnight, sending valuations through the roof or at least keeping them propped up for a while.

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I suspect it's because investors think that one of the few routes to 'exit' a company and cash out your investment just got closed down, at least in the short term. That increases the risk of investing and therefore lowers the valuation.

Certainly the path to IPO is so long that someone seeking VC funding today won't be in a climate defined by Facebook. For all its faults, SOX did kill the "retail VC" style of IPO popularized in the last bubble. Getting to IPO now is a very long road.

If people investment was purely logical, you'd be right, but I suspect it is the negative news surrounding the valuations of Facebook and Zynga that will put a bit more fear into the investors willingness to take risks.

You know, you'd think someone who had a real job investing other people's money would be at least as rational as some guy on a message board....

Actually a cyclical stock market cycle typically last 4 years. It's generally accepted that we've been in a bull cycle for the last few years, which is prone to shift, with the lackluster Facebook IPO as "the warning sign". If you're raising VC now, you've probably been in business for 1 to 2 years, which means if you exit in another 4 years, it could very well be a terrible secondary market by then. At least some investors will think so.

Poor market sentiment also affects M&A. I remember from my banking days in 2008, where one of my clients with $2 billion in cash wouldn't even fork over $100 million to acquire a company at 9x revenue with 80% revenue growth.

So over all exit options are appearing less attractive for VCs, thus they're likely to fund less companies at lower valuations.

I believe investors and startups that are / were looking for Facebook as an easy exit were not building a company / business anyway. Such a situation is better overall for everyone - only the teams that are focused on building a real business survive and create value for everyone involved.

It's not about a Facebook acquisition no longer being an exit, it's about an IPO no longer being an exit.

Since long ago Facebook is too big to be adquired. Now even less. Who can pay so much money?

I believe he's referring to an acquisition by Facebook being an exit option, not an acquisition of Facebook.

Investor sentiment (as irrational as it sounds) is very important. The "apparent" failure of FB IPO along with the less than impressive performance of web 2.0 companies in the public markets have casted a dark cloud in the industry. Nothing has changed in the material sense, but this narrative is a great opportunity for investors to bargain for better deals.

In the next few months Facebook will create over 1000 new millionaires. Is it to much too assume that many of them will get into inventing, which could actually cause the opposite affect of what you're suggesting where there is even more money available?

Not sure if you meant investing or inventing (or both). But either one of those could have interesting implications in the valley.

Whoops. Yea I meant investing. My assumption was that some part of a 1000 new millionaires would hopefully be putting some money back into the system through investments. I also think you'll see some people leave Facebook as they vest to go start companies of their own.

The number of millionaires created and the amount they have available to invest are directly related to the stock price. If the price is low, shareholders won't sell, so there won't be new cash to invest in other startups.

At the rate FB is falling, there won't be 1000 new millionaires by that time

FB is still going to be worth $40B?. Its not $100B+, but there are plenty of people that are going to make a lot of money if they sell.

Also check out Fred Wilsons response (http://www.avc.com/a_vc/2012/06/some-perspective.html). He makes some good points about the returns still being pretty damn good.

If you do the arithmetic, yes there will. At any rate, you don't need to be a millionaire to do venture investing.

At the rate FB is falling, it will be worth less than 12 billion in 3 months.

It's these kind of forward projections that cause booms and busts, ie. people assuming that housing prices will increase at a steady/regular rate over time. Just as we saw that this doesn't happen in a steady way, nor will facebook steadily decline over the next 3 months.

People won't start investing necessarily. Look at the 10,000 millionaires that came out of MSFT in the Redmond area...... only a fraction are investors.

The bad performance of Facebook will cool the attitude of institutional investors towards online investment.

That will make it harder for the B-Grade VC companies to raise money, which will reduce the valuations anyone else has to pay to invest.

That has the potential to drive hundreds of millions of dollars into the angel space overnight, sending valuations through the roof or at least keeping them propped up for a while.

Not really. The crazy valuations were typically occurring when VC's got involved at the A round or later - not when early stage investors are working. A lot of early stage investing is done using convertible notes anyway.

One reason why the FB IPO can drive down valutions can be the following:

When VCs are worried that they won't ever get a multi-billion dollar IPO to cash in and thus generate returns they will be forced to get the same junk of any given start-up for less money in order to create the the same return factor.

Anyone correct me if I'm wrong.

We ran out of 401k money to buy IPOs

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