Facebook's IPO May Harm Young Tech Startups, Expert Says

Posted: Updated:
Facebook's IPO is having a trickle-down effect in the investment community. | Getty Images

Silicon Valley startup guru Paul Graham has issued a warning to entrepreneurs on the hunt for venture capital in the wake of Facebook's tumultuous public stock offering.

"If you haven't raised money yet, lower your expectations for fundraising," said Graham in a letter to founders posted on Hacker News on Tuesday.

Graham, the cofounder of influential startup incubator Y Combinator, urged entrepreneurs to shift some of their focus from fundraising to making their companies profitable.

"The startups that really get hosed are going to be ... the ones that raise a lot on easy terms, and are then led thereby to spend a lot, and to pay little attention to profitability," he wrote.

"That kind of startup gets destroyed when markets tighten up," Graham added.

Since Facebook went public on May 18, shares of the social networking company have plummeted in value. The ripple effects appear to be affecting other proposed IPOs, as several large technology companies recently pushed back their plans to go public, citing poor market conditions.

Yet some market observers maintain that Facebook's IPO will be a win for startup land because even the company's depressed stock price still represents a high valuation for the firm, signaling optimism among technology investors. Plus, the offering may have served to deflate a growing tech bubble.

"If speculators are disappointed with the performance of the Facebook IPO it is because they had ridiculous expectations of what rational investors would pay," wrote Fred Wilson, a New York venture capitalist in a blog post responding to Graham's letter.

"The market has put a premium valuation on a great company and we should be happy about all that," Wilson said. "I certainly am."

Around the Web

Will Facebook's IPO Woes Hurt Start-Up Funding?

Facebook IPO: Once Again, Wall Street Wins, Muppets Lose

Facebook comments, ads don't sway most users: poll

Cohan Blames Investors for Buying Facebook IPO Hype

Facebook IPO: Low-Profile Analysts Shine

Thomas J. Henry Injury Attorneys Investigating Facebook IPO

Facebook to 'disappear' in under 10 years, according to analyst