Y Combinator’s Paul Graham warns of tightening wallets in wake of Facebook IPO

Facebook Thumbs Down

Facebook has been one of the most prominent tech IPOs to date, and its failure to perform at the level of the public’s expectations is sending shockwaves throughout the tech community. In response to the underperforming IPO, Paul Graham, the venture capitalist and co-founder of seed funding capital fund Y Combinator, emailed an ominous message to its portfolio of companies about the hard times ahead for early stage startups that are seeking out investors.

“Jessica and I had dinner recently with a prominent investor. He seemed sure the bad performance of the Facebook IPO will hurt the funding market for earlier stage start-ups. But no one knows yet how much. Possibly only a little. Possibly a lot, if it becomes a vicious circle,” Graham writes.

Much of this does in fact directly result from Facebook’s stock price, which opened today at $26.70 per share, dropping more than $11 dollars since its IPO at $38. At a $26.70 opening, Facebook’s market cap (valuation) sits at $58.77 billion dollars, far below the valuation that the company had opened at $104 billion.

Some may not be surprised by Facebook’s performance. It has been a vertically structured company, relying solely on advertising revenue with an aggressively priced IPO. Google on the other hand expanded its search advertising business with its foray into various facets of technology and endeavors including its suite of productivity products and even a self-driving Google car. At this rate, Facebook’s future may rely on its rumored development of a Facebook smartphone, or else risk disappearing in a matter of eight years.

But why would Facebook’s performance affect other start-ups?

Valuations among start-ups seeking funding will typically be pegged to an existing IPO as an indicator of how the start-up may ideally perform in the market. For social-networking applications and its variants, the valuations may be pegged to Facebook’s own, which has toppled nearly 50 percent. That could mean that Facebook-like companies will be worth considerably less than initially anticipated. Consequently, investors will expect lower valuations from start-ups and invest less than they would have otherwise. This is the same sentiment that Graham expressed in his letter, followed by the suggestion that companies should think about their bottom line and revenue.

“What does this mean for you? If it means new start-ups raise their first money on worse terms than they would have a few months ago, that’s not the end of the world, because by historical standards valuations had been high. Airbnb and Dropbox prove you can raise money at a fraction of recent valuations and do just fine. What I do worry about is (a) it may be harder to raise money at all, regardless of price and (b) that companies that previously raised money at high valuations will now face ‘down rounds,’ which can be damaging.”

Facebook’s fallout may bring start-up founder’s expectations, particularly those pitching social-networking apps, back down to reality. After all, as an investor, who would want to pump money into another Color? The start-up raised a whopping $41 million from investors even before its launch, but disappointed with a meager 30,000 daily users.

Paul Graham may be right when it comes to how Facebook’s IPO will impact the investor’s sentiments among start-ups, but the tech world shouldn’t lose focus of what actually causes the tech bubble to pop. The true dangers lie for the economy will be at the hands of the companies on the verge of an IPO. The bubble pops when the vicious cycle where in companies will seek higher valuations to make its IPO underwriters and initial investors “rich,” according to a source at Citi Bank, despite the risk that an inflated valuation may send stock prices tumbling. 

Mobile

North Focals smartglasses discount cuts the price by a massive $400

Canadian startup North is hoping smartglasses will be the next big wearable. After announcing its new Focals smartglasses in late 2018, the company opened product showrooms in Brooklyn and Toronto and has made its first shipment.
Smart Home

Eight Sleep’s Pod bed keeps you cool (or warm) and tells you how you’re sleeping

Americans are chronically sleep deprived and startup Eight Sleep wants to change that. The company recently announced The Pod, a biometric-tracking, temperature-regulating smart mattress.
Emerging Tech

Atomo’s ‘molecular coffee’ is brewed without needing to harvest coffee beans

Coffee beans, huh? Who needs ‘em? Apparently not the folks behind Seattle-based startup Atomo, who claim to have created a cup of "molecular coffee" that requires no beans to be harvested.
Smart Home

Nebia partners with Moen to develop a warmer, better showerhead

Silicon Valley startup Nebia has partnered with Moen to produce the Nebia Spa Shower 2.0, a showerhead that reduces water consumption while delivering higher temperature and water pressure.
Social Media

Twitter boss again teases the idea of a button to edits tweets

Twitter CEO Jack Dorsey has suggested the company is still looking at options for allowing people to edit tweets. Ideas include a function that gives you up to 30 seconds to recall a tweet before it goes live on the service.
Social Media

‘Instagram egg’ embarks on a new adventure as man behind it is unmasked

The Instagram egg made global headlines recently after it became the most-liked post on the photo-sharing app. The person behind the account has now been revealed, as has his reason for choosing an egg for the stunt.
Social Media

Periscope tool adds guests to feeds so streamers can become talk show hosts

Periscope users can now invite viewers to chime into the conversation with more than just the comment tool. By enabling the option to add guests, livestreamers can add guests to the conversation, in audio format only.
Photography

Crouching, climbing, and creeping, the perfect Instagram shot knows no bounds

Just how far will you go for the perfect Instagram? A recent survey shows just how willing Instagram users -- and Instagram husbands -- are to climb, lie down, embarrass themselves or let their food go cold for the perfect shot.
Social Media

Facebook’s long-promised ‘unsend’ feature arrives. Here’s how to use it

Send a message to the wrong person? Messenger now gives you 10 minutes to take it back. After an update beginning to roll out today, users can now retract messages if they act within the first 10 minutes after sending the message.
Social Media

YouTube boss admits even her own kids gave the ‘Rewind’ video a thumbs down

YouTube's 2018 Rewind video went down like a lead balloon at the end of last year, becoming the most disliked video in its history. And now YouTube's CEO has admitted that even her own kids thought it was pretty darn awful.
Social Media

Snapchat finally recovers from its redesign — so here comes an Android update

Snapchat's drop in users after launching a controversial redesign has finally stagnated. During the fourth quarter and 2018 earnings report, Snapchat shared that the company is rolling out an Android update designed to increase performance.
Social Media

Skype’s new ‘blur background’ feature could help keep you from blushing

Skype's latest feature for desktop lets you blur your background during video calls. The idea is that it keeps you as the focus instead of distracting others with whatever embarrassing things you might have on show behind you.
Social Media

Twitter users are declining but more people are seeing ads every day

Twitter's end-of-the-year report for 2018 is a mix of good and bad news. The good news is that more users are seeing adds daily, the metric the company will focus on moving forward. But the bad news is that monthly active users are…
Web

Switch up your Reddit routine with these interesting, inspiring, and zany subs

So you've just joined the wonderful world of Reddit and want to explore it. With so many subreddits, however, navigating the "front page of the internet" can be daunting. Here are some of the best subreddits to get you started.