The IPO market is critical to the U.S. economy: It’s both a way for companies to raise huge amounts of money and a way for early-stage investors to get outsized returns for taking big risks.
Unfortunately, things have been pretty tough lately, especially for Internet and social deals. Just look at the plunges in valuation for companies like Facebook (NASDAQ:FB), Groupon (NASDAQ:GRPN) and Zynga (NASDAQ:ZNGA).
So in light of this, are we starting to see a negative impact on web start-up funding? Well, according to a piece in The Wall Street Journal, it looks like the answer is yes.
Angel investors and venture capitalists (VCs) are apparently starting to focus much more on business models and the sustainability of new ventures. And because of this, the general trend is towards lower valuation as well as longer funding cycles.
Really, though, this is good news. Let’s face it: The IPO market is about creating true economic value, not just allowing for the availability of cool technologies.
In fact, this is why other tech sectors have fared much better, such as cloud computing and security technologies. Companies like ServiceNow (NYSE:NOW), Palo Alto Networks (NYSE:PANW) and Splunk (NASDAQ:SPLK) have pulled off highly successful IPOs. Plus, these companies are growing at torrid rates and also have solid revenue streams.
As a result, capital will start to flow into these sectors and away from others like social and Internet categories — precisely why the capitalist system is so effective.
And, of course, so brutal for young entrepreneurs — especially those who think that bubbles can somehow last forever.
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 hold a position in any of the aforementioned securities.