The Facebook (NASDAQ:FB) initial public offering truly was a worst-case scenario.
Facebook shares plunged Monday, closing trading down 11% to $34, representing the destruction of $11.4 billion in market value. This is terrible news for other private social media companies, but there’s perhaps no bigger victim than Twitter, whose own valuation probably took a hit today.
As a concept, Twitter is kind of silly. It’s just a stream of messages with a limit of 140 characters, truncating just about most rational thoughts. Still, Twitter has become a global brand and has made a huge impact on the world, illustrated by events like last year’s Arab Spring.
Despite this, Twitter has failed as a business. While Facebook has generated $4 billion in revenues for the past year, Twitter’s are around $140 million to $160 million.
That’s downright terrible.
However, this has not prevented the company from raising $1.16 billion in private money. A big slug of the capital has gone to cash out founders and early-stage investors, so in a way, it’s as if the company already has had a quasi-IPO.
But if Facebook’s stock price remains under pressure, it will be excruciating for Twitter investors who have purchased shares in secondary markets during the past couple years. At the latest funding last year, Twitter’s valuation was at more than $8 billion.
When (well, in this case, if) Twitter pulls off an IPO, public investors likely will demand a large discount on the offering price. The situation will be even worse if Twitter can’t figure out how to monetize its user base.
Frankly, it now seems unlikely that we’ll see a Twitter IPO within the next two years. After all, it doesn’t need the money, so it can wait.
But it could mean that some of the “smart money” in the deal — T. Rowe Price (NASDAQ:TROW), Benchmark Capital, Morgan Stanley (NYSE:MS) and Kleiner Perkins Caufield & Byers — could be facing significant losses. Going forward, they probably will be more restrained on the valuations they throw around on their funding rounds.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.