The Breakdown

Explaining Southern California's economy

Facebook IPO: Will it rescue venture capitalism?

Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California.
Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California. Getty Images

The venture capital business has been under some stress for a while now. It's not that it's doing all that badly. It's just that it isn't doing as well as it has in the past. This is related to the overall weakness in the economy, not just in the U.S. but also Europe: it's tougher for VCs to raise money, and it's tougher for VCs to sell their portfolio companies to established firms or exit their investments via initial public offerings (IPOs).

But that could all change with the much-anticipated Facebook IPO, due to happen later this year. 

Or not. This is from Fox Business:

“A little wind may have left the sails after some of the big name IPOs failed to live up to the overblown expectations. VC fundraising challenges are likely to start having a negative trickledown effect,” Tom Rodgers of Advanced Technology Ventures said....

That mixed track record is putting even more pressure on Facebook, which is expected to become the largest Internet IPO on record. Unlike some of the recent Internet companies that stumbled, Facebook has a well-developed business model and an estimated $4 billion in annual revenue, which may pave the way for a valuation of up to $100 billion.

In other words, where VC is concerned, Facebook better be big. And then get bigger. A nightmare scenario would be if Facebook established a market value of $100 billion right out of the box, moves higher for a short period — and then plummets. This would continue the trend of tech IPOs initially looking great, then disappointing. And it would continue the trend at the very top.

Follow Matthew DeBord and the DeBord Report on Twitter.

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