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What Facebook’s IPO means for VCs and entrepreneurs

The social networking giant’s showing on the public market may land with a thud.

If you’ve been greedily scanning the headlines about Facebook’s IPO — wondering whether the social networking giant’s move to go public will serve as the spark venture capitalists need to launch a new flurry of funding — you may be disappointed.

Facebook looks to be grossly overvalued. If the estimates are true and Facebook is worth $75 billion to $100 billion, Mark Zuckerberg’s legacy, which reeled in $3.8 billion in 2011, would have a price-to-sales ratio of 19.7. (If you’re not a stock trader, the price-to-sales ratio is determined by dividing the total value of a company’s shares by its revenues. When this ratio is smaller, it’s considered a better investment as the buyer is paying less for each unit of sales.) So in other words, Facebook’s shares are 497 percent more expensive than Apple’s and 294 percent costlier than Google’s.

Make no mistake, the Facebook initial public offering will enrich its backers like the venture capital firms like Digital Sky Technologies and Greylock Partners. But for other VCs and entrepreneurs, the Facebook IPO will only mean something if it unleashes a fever for start-up investing that creates an insatiable appetite for more IPOs. But there are two reasons why a Facebook IPO will not lead to that outcome.

…to read this article in full, visit leading US entrepreneurial resource, Entrepreneur.com.