Face Value: The Pitfalls of Investing in IPOs

Hoping to hit on the next Apple or Google, investors looked at Facebook's IPO as the next gravy train. But with the stock still down about 16 percent from its IPO price, most who got on board early have been disappointed. Yet, Facebook's shortcomings as an over-hyped IPO isn't an anomaly, and it provides essential lessons in start-up valuation.

Looked at closely, almost every Internet-based IPO from the last two years is now worth a lot less than when they were first issued. There's been a huge influx of social media websites/companies that have issued IPOs in the last year, and, unfortunately, the situation is reminiscent to the dot com bubble of 12 years ago. That's when NASDAQ peaked at 5,132 and then dropped below 2,000 -- losing $5 trillion in market value in the process.

At the time, any website with a catchy name went public. There was a lot of buzz surrounding sites like pets.com, geocities.com and infospace.com, none of which are even around today.

Here are a few more that came in with a flourish but haven't quite lived up to expectations: Stock in Groupon, the online coupon site, is down more than 50 percent from its initial offering price. Friend Finder Networks IPOed at $10 and the stock has since tumbled below a dollar. Zynga, which produces social media games like Words with Friends, is down more than 40 percent from the $10 a share its stock initially sold for at the end of 2011.

Of course there have been a few winners as well, like LinkedIn, which IPOed at $45 a share in May 2011 and is now selling for $104.

The lesson to be learned is that the need to get in on the ground floor sometimes leads over-eager investors into the basement. Just because an idea shows promise, its potential may take a while to be fulfilled. Avoid the hype and keep on eye on performance before jumping in feet first willprove to be a much better course of action.