Startups must lower hopes after Facebook: Paul Graham

Tue Jun 5, 2012 6:56pm EDT

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(Reuters) - Prominent Silicon Valley investor Paul Graham is warning the startups he fosters to ratchet down their fundraising expectations and conserve cash - and he blames Facebook.

"If you haven't raised money yet, lower your expectations for fundraising," he wrote Tuesday in an email to his startups, a copy of which was obtained by Reuters. "If you've raised a lot, don't spend it."

Facebook's (FB.O) poor performance since its initial public offering last month has many investors wondering whether startups are truly worth the high valuations some had been willing to pay in recent months.

Graham opened the letter by describing a recent dinner with an investor who said Facebook's decline would hurt valuations for early-stage startups. "But no one knows yet how much," Graham wrote. "Possibly only a little. Possibly a lot, if it becomes a vicious circle."

Graham cofounded Y Combinator, an organization that supports and funds startups and has backed high profile companies such as online home-rental business Airbnb.

A separate follow-up email sent to the startups by Geoff Ralston, also a partner at Y Combinator and the creator of RocketMail, warned of a potential global crisis should Spain require a bailout.

"It could get ugly and stay ugly for some time, and I believe it very unlikely that this won't impact startup funding," Ralston wrote.

(Reporting By Sarah McBride in San Francisco; Editing by Phil Berlowitz)

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