05/31/2012 01:33 pm ET Updated Jan 24, 2013

Ditching IPOs After Facebook: Kayak May Be First Of Many To Say No

One fear racing through the minds of investors in the first two weeks after Facebook's IPO is that the stock's rapid descent will chill the market for initial public offerings.

That fear became a reality Wednesday when Kayak confirmed reports that it will pull the plug on its IPO. The online travel service is the first U.S. Internet company to officially ditch IPO plans since Facebook's share price started tumbling in mid-May -- and market observers predict it won't be the last.

Citing market conditions, Kayak will reportedly postpone pitch meetings with potential investors, who are still licking their wounds. The Kayak deal was to be led by Morgan Stanley, the same bank that served as lead underwriter for the Facebook IPO.

Facebook shares closed Wednesday at 26 percent below the social networking firm's issue price.

"Kayak is among a handful of Internet companies that were told if they just waited until after May 18th, then Facebook would open the door to the public markets," said Sam Hamadeh, CEO of the financial analysis firm PrivCo. "But Facebook has instead cast a black cloud over IPOs."

Hamadeh counted Spotify, AirBnB, Box and Glam Media as other Internet startups that hoped to ride Facebook's coattails, only to find that technology investors' appetite for new offerings has all but disappeared since Facebook's IPO turned into the worst-performing flotation over $1 billion in the past decade.

"IPO market shut. See you in 2013," tweeted SecondMarket CEO Barry Silbert last week, as several tech companies announced plans to push back IPOs, including computer hardware maker Corsair Components and laser hair removal products producer Tria Beauty.

This week, Russia's most popular social network, Vkontakte, delayed its offering, as the site's founder blamed the Facebook IPO for damaging "investors' trust in social networks."

The apparent slowdown dampens an already tenuous U.S. market for new issuers. There have been only 17 U.S. IPOs so far in the second quarter of 2012, compared with 27 during the same period last year, according to IPO research firm Renaissance Securities. And only 18 companies filed IPO registration statements, a 74 percent decline from last year.

"Going public is really a thing of the past except for the largest of companies," said Tim Draper, a Silicon Valley venture investor.

As the allure of IPOs declines for now, rapidly growing companies in need of cash face two options: sell themselves to a larger company or try to live off money from the private markets.

"There's an increasingly vibrant private market where founders and venture capitalists can get all the liquidity they want," said social media investor Lou Kerner, founder of the Second Internet Fund, in an interview last week.

But even that thinking may have changed this week as Facebook's stock dipped below the price many investors paid on pre-IPO stock exchanges like SecondMarket, where private shares in the social networking giant changed hands for nearly four years leading up to the May 18 IPO.

"What happens in the public markets certainly affects what happens in the private markets," said John Frankel, a partner at the firm ff Venture Capital. Frankel warned that entrepreneurs who have eschewed an IPO in the hopes of finding money in the private market may soon feel the pinch: Angel investors, venture capitalists and institutional investors are likely to pull back as they face the prospect of losing money this November, when federal securities regulations free them to sell their pre-IPO Facebook shares on public stock exchanges.

Naveen Jain, the CEO of Intelius, an online public records provider that canceled its IPO in late 2010, advised entrepreneurs to try to cash out while they still can.

"Private company valuations are high enough in this bubble that most private companies are better off selling themselves to other public companies or to other private companies that have raised a lot of cash in the private markets," Jain said.

Buddy Media, a five-year-old startup that helps brands manage their Facebook presence, did just that this week. It agreed to be bought by cloud computing giant for $800 million, sources told the Wall Street Journal.

Jain is reminded of business magnate Mark Cuban, who chose to cash out the last time that overhyped IPOs like Facebook's started falling from the sky. In 1999, just months before the tech bubble burst and valuations for Internet startups plummeted, Cuban sold his company to Yahoo for $5.7 billion.