Facebook Fallout: Less Funding, More M&A

After an agonizing fall since the IPO, Facebook (NASDAQ:FB) shares are trading up about 0.5% in today�s trading — which would be encouraging, except when you compare it to the monster rally going on across the markets. The Nasdaq is up more than 2% in midday trading, and Zynga (NASDAQ:ZNGA) and Pandora (NYSE:P) are among social players enjoying much healthier gains than FB.

Obviously, Facebook’s investors can’t be pleased by the shares’ lag, but there might be bigger consequences to prolonged weakness in FB stock.

Facebook Makes a Move on Mobile Ads

First off, expect a pullback on funding for early-stage companies. Already, top investors — like Y Combinator�s Paul Graham and Union Square�s Fred Wilson — have made warnings about this possible outcome.

No doubt, venture capitalists need a healthy IPO market to get sustainable returns. One might have excused the rough IPOs of the likes of Groupon (NASDAQ:GRPN), Zynga and Pandora, but if Facebook is unable to excite investors, what will?

The problem is numerous hot private tech companies have raised huge sums over the past few years, and VCs probably are getting antsy. If the IPO option is closed — perhaps for the rest of the year — how will they salvage things?

The likely strategy will be to push for acquisitions. For example: This week, cloud operator Salesforce.com (NYSE:CRM) agreed to acquire Buddy Media for $689 million. The company develops marketing software for social media, with a big emphasis on Facebook. Perhaps Buddy Media realizes there might be a potential slowdown, and it might be best to be part of a larger organization.

Then there was Google�s (NASDAQ:GOOG) acquisition of Meebo. The buzz is that the purchase price was $100 million — that seems fairly meager considering the company has more than 220 million users, which is roughly a quarter of Facebook’s members.

Now, the buzz from Business Insider is that Twitter might be looking for an exit. The suitor? It appears to be Google.

While Twitter is optimistic that it will reach $1 billion in revenues in 2014, that figure is far from a sure thing. But by combining its platform with the brains in Menlo Park, Twitter should be able to ramp up its monetization.

The current hang-up is valuation, but here’s where Facebook comes back into play: If FB continues to be weak, companies like Twitter might have to greatly reduce expectations if they want to get a deal done.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of �The Complete M&A Handbook”, �All About Short Selling� and �All�About Commodities.� Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.