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.
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.
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?
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.
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.
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.
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.
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.
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.
