Y Combinator

John Gapper

The dismal performance of Facebook’s initial public offering, after several years in which it was expected to crown the emergence on public markets of social networks, is bound to dampen the mood in Silicon Valley.

Paul Graham, who runs Y Combinator, a start-up incubator, says the effect will be what you might expect – early-stage valuations will suffer. His email to portfolio companies, obtained by Business Insider, contains this warning:

“If you haven’t raised money yet, lower your expectations for fundraising. How much should you lower them? We don’t know yet how hard it will be to raise money or what will happen to valuations for those who do. Which means it’s more important than ever to be flexible about the valuation you expect and the amount you want to raise (which, odd as it may seem, are connected). First talk to investors about whether they want to invest at all, then negotiate price.”