What does Facebook’s IPO flop mean for other social media start-ups?

After many months of speculation, Facebook’s highly anticipated IPO didn’t go exactly as planned. The company could previously boast of a valuation worth over $100 billion when its shares were trading in the 30s for most of 2011 on SecondMarket, an American marketplace that buys assets which aren’t easily converted into cash (such as before a company goes public). Shares cost $38 during the company’s initial public opening, but slid down and kept going down. They hit a new low on Monday at a price of 26.90, down 2.96 % from the day before and valuing the company at over $25 billion less than before its IPO.

Time will tell if the company’s value will bounce back but one of the main questions for Silicon Valley is whether or not Facebook’s flop will make investors hesitant to invest in other start ups at the super high valuations easily give to social media companies in the past.

Several start-ups anticipated consequences ahead of Facebook’s IPO and raised venture capital ahead of time. Quora, a question and answer service founded by Facebook alumni, raised $50 million at a valuation of $400 million and Pinterest raised $100 million at a valuation of $1.5 billion.

But many others didn’t. One company that is aiming to raise venture capital at a valuation of $4 billion is Square. Run by Twitter co-founder Jack Dorsey, the San Francisco company is trying to re-invent payment functions through mobile devices and identify software and technologies. Valued at only $1 billion one year ago, the company had a huge increase in value that was similar to Facebook’s valuation growth. Square received a $100 million investment on year ago, and is looking for a $4 billion valuation in its next round of capital funding.

Another hot start-up company, Asana, which is a workplace collaboration network run by Facebook co-founder Dustin Moskovitz,  is looking for funding in the $20 million to $30 million range, with a valuation of $250 million. Online retailers Just Fabulous and Ideeli were looking for $30 to 50 million at $300 to 500 million valuations.

Venture capitalists will general invest in companies they think will be worth three to five times more than their first investment by the time the company announces its IPO.

So that means Square, with its current $4 billion valuation, would have to be worth at least $12 billion a few years down the road, which could prove difficult since the business operates with slim margins and against many strong companies in the industry.

High valuations by Silicon Valley start ups can also have another problem with  a very limited pool of potential buyers. Only the biggest players in town, including Apple, Facebook, Google or Microsoft could buy companies with 10-figure valuations.

But not everyone thinks the start-ups will take a big hit with their valuations. According to earlier media reports, Norwest investor Sergio Monsalve said, “When you look a year from now, two years from now, I’m not sure you’re going to say prices came down at high-quality companies.”

So it looks like investors and companies will have to wait and see if Facebook’s IPO flop was an isolated event or if it will create a ripple effect in the industry.

To learn more about the numbers, check out this interesting chart to explain Facebook’s IPO slide:

http://news.cnet.com/8301-1023_3-57443723-93/heres-the-chart-that-explains-facebooks-ipo-mess/