Instagram's sellers may not be smiling as widely in a filtered photo any time soon.
May 29, 2012 2:45pm EST New York, NY– Aside from a few insiders and tipped off institutions, Facebook, Inc. (NASDAQ: FB) has made very few investors rich. After pricing at $38, Facebook not only failed to pop but has now fallen 24% from its IPO price less than 2 weeks ago to $28.84, in what has become the worst performing major IPO in a decade according to IPO tracking data from PrivCo.
Breaking the $30.44 barrier represents a significantly unpleasant milestone for one shareholder in particular: Instagram. In April, Facebook acquired Instagram for $1 billion comprising $300 million in cash and 23 million Facebook shares totaling $700 million. This price valued Facebook at approximately $30.44/share, close to the $30.48 metric Facebook had been using internally for acquisitions and new RSU issuances.
With Facebook currently sitting at $28.84/share, Instagram’s valuation falls below its $1 billion deal price to $963 million. When Instagram was acquired for $1 billion, the photo-sharing company had been valued at $500 million just days earlier. (The Instagram acquisition has yet to formally close, as it awaits U.S. antitrust review.)
While most observers applauded Facebook's acquisition as "brilliant," a few critics were skeptical of the bloated $1 billion valuation for Instagram, a company that not only lacked revenues but also had no business model. At the time, many were forced to contend that Facebook must know something about Instagram’s value that others did not.
However, as PrivCo immediately surmised, Instagram turned out to be Mark Zuckerberg’s knee-jerk and almost panicked reaction to decelerating Facebook ad revenues caused by Facebook users' rapid shift to accessing the site via mobile devices...a fact Zuckerberg had before anyone else given his direct daily access to Facebook's usage data. Additionally, Facebook stock continues to tumble, leaving one thing clear: a social media valuation bubble is present and its burst is imminent.
In a move eerily similar to the first Internet bubble of the late 1990s, Facebook effectively used its overvalued stock to purchase another company's overvalued stock, in this case Instagram. (In addition, $300 million of Instagram's purchased price was to be paid by Facebook in cash.) The acquisition created new valuation metrics for other Internet companies. With the Instagram purchase as a new valuation anchor, PrivCo soon saw new large VC rounds with massive valuations for private companies that are effectively pre-revenue.
On May 17, Pinterest (PrivCo Private Company Ticker: PINTP), a social media site that is virtually pre-revenue and allows users to “pin” images and lists to online boards, received $100 million at a $1.5 billion valuation. Pinterest was valued 7.5x less at $200 million during its prior October 2011 VC round.
Social music site Spotify (PrivCo Ticker: SPOTFYP) followed up Pinterest with its own $220 million VC round at a staggering $4 billion valuation on May 21. Spotify had been valued at less than a quarter of that value during its prior funding round in February 2011.
Like Instagram, these companies’ valuations focus mostly on user count without demonstrated proof of turning these users into substantial revenue. These social media companies are largely unprofitable and lack business models, yet still receive cash inflows and huge valuations on the assumption that their reach translates to sales.
As Instagram sinks from a 10-figure deal to a 9-figure deal, companies looking to ride Facebook's coattails to massive venture capital or M&A valuations, or forthcoming IPOs, already appear to be sobering up in the wake of Facebook's poor IPO reception.
Facebook's Russian clone, VKontakte (PrivCo Ticker: VKONP), today shelved its U.S. IPO plan seeking a $3.75 billion valuation this Fall, stating, “the Facebook IPO has destroyed the faith of many private investors so VK's IPO is postponed for an indefinite term."
“This is a theme we expect to continue. Based on Facebook’s reduced valuation multiples, weak reception, and overall investor skepticism following this debacle, any private company wanting to price an IPO this summer must likely swallow substantial valuation reductions,” said PrivCo Founder and CEO Sam Hamadeh in a statement Tuesday afternoon. "And for the private venture capital markets, valuations for companies with inchoate business models will certainly come down, with $1 Billion plus VC round valuations again becoming increasingly rare."
PrivCo breaks down members of the "Billion Dollar Club" whose hefty billion dollar plus VC-round valuations occurred before Facebook's IPO flop on May 18th: