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How Facebook's Zucked-up IPO just killed the tech bubble

It was supposed to be the mother of all tech IPOs. Instead of fueling an explosion of dot-com-style madness, Facebook's tepid IPO has kiboshed the nascent tech bubble, at least for now.

After ringing the ceremonial Nasdaq bell remotely from Facebook's Menlo Park, Calif., headquarters, CEO Mark Zuckerberg celebrates with his employees.

You didn't really want to start partying again like it was 1999, did you? Good thing, too. Because you aren't going to get the chance -- not just yet, at least.

Before last Friday, many thought that Facebook's much-hyped IPO might trigger a reprise of the Internet mania unleashed by Netscape's 1995 public offering, when "companies" -- some with little more than a dot-com suffix and marketing spiel -- were able to lure investors en masse.

And just as in the run-up to the great tech bust, some saw history repeating itself, what with animal spirits convincing venture investors to award $1.5 billion valuations to cash-burning startups with TBD business models. It sure looked like a tech bubble was forming.

Then Facebook happened. More specifically, Facebook went public and all the expectation -- and, for many, hope -- that the industry was entering the next phase of the boom/bubble came to a screeching halt.

"Traders on Wall Street and main street were hoping for a return of a 1999 bubble," said venture capitalist George Zachary of Charles River Ventures. "And startup founders and investors who aren't rich and want money to rain down on them feel spooked that it won't happen now because Facebook didn't spike upwards."

They're likely right. Big and small investors alike got burned with Facebook, which is now trading around $31 a share, about 16 percent off its offering price. Government investigators are trying to determine if any rules were broken when the underwriters reportedly warned their big customers that Facebook's business was worsening. And lawsuits are multiplying.

The press, meantime, is giving plenty of attention to individual investors angry over Facebook's opening day, with brokers such as Scottrade ducking blame and pointing fingers at the Nasdaq exchange. Mark Cuban, in his post-mortem about the Facebook IPO, warns hyperbolically that we can "say goodbye to the individual investor on Wall Street."

Given the fallout, the next big consumer Internet company gunning to go public -- especially a social play -- is going to be a hard sell all around. Fewer people trust the system. At the very least, who's going to trust Morgan Stanley's word?

Already there are hints of the Facebook backlash visible in other planned tech IPOs. Corsair, a small but profitable maker of components for PC games, yesterday postponed its offering, citing "weak market conditions" -- which some analysts interpreted as fear that a Facebook backlash would punish its debut. ("Our board of directors decided to postpone due to weak equity market conditions," a spokesman for Corsair told me. "I'll have to leave it to financial analysts to comment on the causes for the weak equity market.) Sure smells like the Facebook effect.

Plenty of smart people have argued that Silicon Valley has been in an early stage bubble for a while now. (Here, for instance, is my interview on the subject with Facebook founding president Sean Parker.) That's largely because an army of angel investors has been making hundreds of small bets -- which amounts to some big money in aggregate.

Recently, though, the bubble talk has extended to bigger private companies landing fat valuations. A sampling: new social darling Pinterest (recently valued at $1.5 billion), Instagram ($500 million a week before Facebook bought it for twice that), and Spotify, which a day before Facebook's IPO was reportedly raising $220 million at a $4 billion valuation. And let's not even talk about Twitter.

Driving such optimism has been the seemingly revitalized IPO market -- LinkedIn, Yelp, Groupon, and Zynga, among others -- as well as the recently passed JOBS Act, which makes it easier for smaller startups to go public. Even though some recent IPOs, particularly those of Zynga and Groupon, didn't fare well, Facebook was supposed to be different. Big time. With its gigantic customer base and household name status, Facebook was going to turn on the IPO faucet.

How long the Facebook effect might close the IPO market is a bit of a guessing game. None of the hot private companies has immediate plans to go public. And as far as half-baked companies hoping to going public amid a return to 1990s mania -- well, that's just not going to happen.

"Public investors have just been burned too many times on early stage companies," said Jay Ritter, a University of Florida finance professor and IPO expert. "We just don't have a bubble going on after companies go public." In other words, it turns out investors want to see a strong business model, from Facebook on down.

More immediately, though, you can bet that VCs will look long and hard before valuing private companies above, say, $500 million. Even with the early stage companies, some VCs are hopeful the Facebook aftershock tempers the bidding wars.

"There's so much money chasing early stage companies these days that you end up with outright stupidity," said Jeff Clavier, the founder and managing partner of SoftTech VC, one of the most active seed stage investment firms in Silicon Valley. "I hope we have that reality check."

In some ways, the early stage excitement also will be tied to Facebook. If Facebook's stock does well -- or even simply starts to climb instead of cratering -- in coming months, a lot of fresh Facebook millionaires will cash out. Some will bolt to do their own startups. But some will take another popular career path for the young and rich: They'll become full-time angel investors, pouring more money into companies trying to become the next Facebook.