Following Facebook's IPO we declared a bubble burst and now we're seeing that hit the start-up ecosystem as investor money becomes harder to find. "The frothy bubble is over," an analyst told The Wall Street Journal's Pui Wing Tam and Amir Efrati. And that defrothing has happened in large part because of Facebook's performance over the last three months. It's not just the social network's stock that has failed to boom in the months following its public offering, fledgling tech companies are now having a hard time raising money, as a result. Rather than just fork over the bucks to an up-and-coming app, investors have a new found curiosity in potential profitability and revenue. See: investors want to put money into companies that will bring mega riches. Before, users were enough to feed those fantasies. But Facebook's wimpy stock has since crushed that dream, making it harder for these other social media start-ups, to convince investors to buy in.
Until now, these nascent companies could attract dollars based on their popularity, rather than profitability, as we discussed a few months ago. Facebook was the shining exemplar of that model. That is, before its public days. The company brings in lots in ad revenue ($992 million at last count), but it got such a big ($100 billion) valuation based on its large, engaged user base. Those people not only were eyes for standard web-ads, but Facebook also promised a better, more personalized form of advertising. The social network has yet to prove it can deliver on that—engagement is falling, likes don't always work, and the company has yet to really show its advertising works better than a regular website. This has ultimately hurt its bottom line, causing its stock to stall around the $20 mark for the past month of so and leading to slashed projections for ad revenue in the next year.