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Facebook's Fallen Stock, a Cautionary Tale for Startups

Wednesday, 22 Aug 2012 | 10:31 AM ET

As Wall Street watches Facebook's stock continue to plummet, it's not just impacting investors, it's also casting a long shadow across venture-backed startups.

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Now that Facebook's bubble has burst, startups that once wanted to be the next Facebook, now read its stock price as a cautionary tale, and keep it in mind as they plan their future. (Related Link: Jim Cramer - Thiel's Sale of Facebook Stock 'Tawdry'.)

And it's not just Facebook having this impact; look at Zynga, down 70 percent since its IPO price and Groupon, down more than 75 percent since its IPO.

In the wake of Facebook's IPO, the bar for going public is much higher, said private company expert Anupam Palit, at Greencrest Capital. There's a huge focus for growth prospects —companies’ ability to show how they'll generate cash and keep up growth over the long term. Palit also warns that investors, and bankers, are putting more pressure on the importance of competitive advantage. (Related Link: Facebook's Stock May Keep Falling - 'There's No Bottom'.)

The result: venture-backed companies are taking about six months longer to file to go public than they did pre-Facebook IPO, Palit added. And valuations have come down some 20 to 30 percent.

And two of the largest private social players — Twitter and LivingSocial — have said they're not planning IPOs any time soon. Instead they're relying on venture financing, and in LivingSocial's case, backing from Amazon . And while some companies are simply holding off on an IPO, others are coming around to the idea of selling to a tech giant — Microsoft , Oracle and Salesforce have all been snapping up social tools.

It's not all bad news — especially when looking at the big picture. According to Renaissance IPO research, initial public offerings that have hit that higher bar and gone public since Facebook have an average return of 18 percent. That list includes ServiceNow , with a 66 percent return and Palo Alto Networks with a 55.9 percent return. And Renaissance's Paul Bard pointed out that Europe has been a much bigger issue than Facebook —outside the social Internet space.

And so far we haven't seen Venture Capital investors be discouraged. In the second quarter the number of early stage deals reached the highest total since 2001. The second quarter, though, only includes one month following Facebook's IPO. (Related Link: Facebook 'Close to Being Etremely Attractive' - Pro.)

We'll see how those numbers hold in the third quarter.

-By CNBC's Julia Boorstin
@JBoorstin

Questions? Comments? MediaMoney@cnbc.com

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  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.