Facebook’s stumble may cool IPOs in Silicon Valley

SAN FRANCISCO — Outside Facebook’s Silicon Valley campus is a giant sign with a hand giving a thumbs up.

It may be the only place on the planet where Facebook is getting one of those.

The company’s initial public stock offering was supposed to fling open the public markets for Silicon Valley start-ups and usher in a new era of prosperity here. Instead, the most hotly anticipated technology offering in years disappointed investors and drew heavy scrutiny from lawmakers and regulators.

The botched debut could cast a long shadow on Silicon Valley, cooling — at least for now — investors’ enthusiasm for other top IPO prospects including Twitter, Box, Spotify and Rovio. That in turn could have a ripple effect, deflating soaring valuations of up-and-comers and the prices private investors are willing to pay for shares of young companies on the secondary markets.

Facebook debuted on the Nasdaq May 18 priced at $38; it traded as high as $45 that day before falling back. The stock closed down $1.12 on Friday at $31.91.

“It may create a little bit of a drag effect on the whole tech sector,” said Lee Simmons, an industry specialist and IPO researcher at D&B.

The Facebook effect is already being felt. Corsair Components, a Fremont, Calif., company that designs and sells hardware components for personal computers and gaming hardware, was the first tech company to table its IPO slated for last week. It blamed “market conditions” for the last-minute postponement.

Sam Hamadeh, the head of research firm PrivCo, called it “the first clear sign of fallout in the IPO market from the problematic Facebook IPO” and predicted a “black cloud over the IPO market.”

“Any IPOs wanting to price this summer will need to take a substantial reduction in valuation to get their deals done, or otherwise delay IPOs until sentiment improves, which could be months at a minimum,” he said.

Facebook’s IPO, like Netscape’s in 1995 and Google’s in 2004, was supposed to be a shining monument to Silicon Valley ingenuity. Instead it has dredged up unpleasant memories of the dot-com bust. And it has magnified doubts about Facebook’s business prospects and the experience and judgment of its management team.

Facebook and its underwriters overestimated demand in pricing the IPO. That, coupled with technical glitches on the Nasdaq, turned what many had hailed as the deal of the century into a flop.

The fallout hit Main Street particularly hard. Underwriting banks warned big institutional investors before the IPO that Facebook’s revenue prospects had dimmed, but they did not warn individual investors. About 25% of the shares in the social network were reported to go to retail investors, costing them more than $600 million.

These investors, many of whom are among Facebook’s 900 million users, thought owning shares was a ticket to free or fast money, said Scott Sweet, senior managing partner of IPO Boutique.

“That may be naive thinking, but you can probably take a lot of inexperienced retail investors … out of the IPO ballgame now,” he said.

Richard Hart, 66, bought 200 shares of Facebook through Morgan Stanley on the first day of trading. Spooked by all the bad news, he dumped them the next trading day, taking a loss of $1,000. The retired Huntington Beach resident called the experience a “disaster.”

“It was a chance to be part of history,” he said. “This was my first foray into an IPO, and it’ll probably be my last.”

That crisis in investor confidence is palpable at Buck’s, the Woodside, Calif., diner where deal makers grab breakfast. Patrons are still a bit shellshocked by Facebook’s epic IPO failure, diner owner Jamis MacNiven said.

“It’s like someone threw a cherry bomb in the Jell-O bowl,” MacNiven said. “Everyone looks bad.”

It’s not just retail investors who got burned. Said one venture capitalist who spoke on the condition of anonymity: “In February there were a lot of secondary trades at $40 via SharesPost. Those buyers are looking back at those now and wondering what they were thinking.”

Facebook may have to get used to its new status as the party pooper. Observers say the public drubbing is likely to continue for months as it’s raked over the coals by lawyers, regulators and lawmakers.

“We are talking about a premium name trading at premium multiples, so these types of issues are going to have a premium impact,” S&P Capital IQ analyst Scott Kessler said after putting a “sell” recommendation on Facebook last week . “I definitely think Facebook has been tainted. It’s going to take some time before this situation is completely vetted and resolved.”

On Facebook’s Menlo Park, Calif., campus, staffers are trying to keep their heads down and put the best face on a bad situation.

Facebook founder and Chief Executive Mark Zuckerberg reportedly counseled employees not to pay attention to the headlines blasting across the Web or the gyrations of Facebook’s stock price. That may be more of a challenge now that they are saddled with sinking shares that they can’t cash in for several months. Facebook also may have a tougher time competing for engineers and designers in Silicon Valley’s superheated talent wars, and could suffer “brain drain” as employees look for brighter opportunities elsewhere.

Still, many in Silicon Valley are shrugging off the turmoil. The most recent tech boom has created tens of thousands of jobs, driven up San Francisco Bay Area rents and housing prices, and fueled the creation and expansion of other businesses such as restaurants.

Entrepreneurs say they haven’t been distracted by the Facebook fireworks, and investors say they will continue to back innovative companies in hot areas such as social networking and mobile applications. Earlier this month two start-ups, Evernote and Pinterest, raised new rounds of funding that valued them at more than $1 billion each; Quora, run by early Facebook employees, scooped up a $400-million valuation.

“We are all looking at this through the lens that Facebook created $87 billion worth of value in eight years. That has two more zeros in it than what makes most people happy,” said venture capitalist Jeremy Liew, managing director at Lightspeed Venture Partners.

Some analysts are still bullish on Facebook. Needham analyst Laura Martin launched her coverage of Facebook last week with a “buy” rating and a $40 price target.

“I don’t think long term there will be any less demand for anything Silicon Valley produces,” Wedbush Securities analyst Michael Pachter said. “There will always be measured demand for shares in these companies.”

The troubled performance of an IPO is not necessarily an indicator of future failure, points out Kevin Hartz, CEO of San Francisco online ticketing start-up Eventbrite and an angel investor. Google, which in 2004 used a Dutch auction to sell its shares, had to reduce the offering price to $85 a share, down from a range of $108 to $135;Amazon.com, which raised its offering price at the last minute, had a big jump on its first day of trading in 1997 but soon saw its shares sink below the $18 IPO price.

“It’s where the business is in five years, 10 years and 15 years, not during one particularly volatile week,” said Hartz, who called Facebook “a remarkable Silicon Valley Cinderella story.” “I own Facebook shares, and I don’t feel any urgency to sell. Companies are not made or broken in the IPO.”

jessica.guynn@latimes.com

andrea.chang@latimes.com