Startups are sinking. Will Facebook drown because of them?

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One thing is no longer arguable among Silicon Valley observers: a time of reckoning has arrived for startups. Many startups, whose growth has been fueled not by profits, but by venture capital dollars, will fail – not because they don’t provide good services or because their platforms don’t fundamentally make our lives better, but because they’re inherently bad businesses, with no hope of ever turning a profit. The unit economics, for many of these unicorn startups, just do not – and will not – work out.

These startups are bound to sink. But the damage might not be contained to the individual companies. If history is any indication, then these companies might just bring Facebook, the de facto social network of the 21st century, down with them.

At the height of the dot-com bubble, Yahoo! was worth $128 billion. Less than five years later, the company’s market cap shrank to less than 10% of that – just a mere $10 billion.

What happened?

As it turns out, the advertisers fueling Yahoo!’s hyper growth were not traditional, decades-old businesses, as you might expect to see in print/TV ads. They were, instead, venture-backed businesses themselves, who decided that Yahoo! was a valuable enough partner and growth engine for them to pour tens, or even hundreds, of millions into the company’s advertising business. When these dot-com venture-backed (although some of them did IPO, they were more or less worthless) businesses imploded, so did Yahoo!’s main revenue stream. And with that, Yahoo! drowned along with those crappy businesses.

While Facebook’s new products and ventures are exciting and all, Facebook still makes all of its money through a familiar revenue stream: advertising. Now, we’re facing a rather steep correction in Silicon Valley – or as Kholsa Ventures’ Keith Rabois puts it, “the price of oxygen has increased”. VCs are getting increasingly selective as to which companies they’re extending their life lines to – and companies without a clear path to profitability are going to be left out to dry. This acute pullback in VC money is something most startups have yet to experience, and with this sudden and abrupt change, many would have to change their growth acquisition strategy. They can no longer spend as much money buying growth on Facebook, which, until now, has been the most brainless (or logically straightforward, depending on how you view it) tactic that a company looking to juice their numbers could execute.

This loops Facebook into the vicious cycle: less VC money equals less money to pursue aggressive growth, which equals less money to dump in the easiest channel to buy growth and user acquisition (read: Facebook), which equals to a slow at first, then rapid decrease in Facebook’s revenue stream from these venture-backed startups. Eventually, this equals to Facebook’s market value plummeting.

This confluence of events: a cooling demand for private technology stocks, the tightening of many startups’ user acquisition costs to ensure that everything they do can be proven out in the customers’ lifetime value, and the unwillingness for VCs to back new businesses (preferring to deploy remaining capital to keep startups they’ve previously backed afloat) will tank Facebook’s stock.

There are two reasonable oppositions to this view: 1) Yahoo! imploded because their user base left them; the same could happen to Facebook if and only if their user base left them too and, 2) Venture-backed startups will be the death of Facebook if and only if it has a huge, unrecoverable exposure to these sort of companies.

Then there’s also the view that Facebook simply wouldn’t sink, for the same reasons Google, another advertising business, wouldn’t. That’s flawed: there are some startups out there who have raised tens of millions but do not have a single person on their teams who have any experience placing ad campaigns on Google. The incredible ease with which someone can place an ad on Facebook makes it leaps and bounds a more attractive platform for newer startups when compared to Google… But this ease may also have increased its exposure to these venture-backed startups. But I digress.

The first opposition view, that Facebook’s user base would not leave them the way Yahoo!’s did, is rather presumptuous, and confuses Facebook’s pervasive reach for its users’ loyalty.

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Facebook (and Facebook-owned Instagram) is still in the lead here, but by no means should it be impossible to envision a future whereby a new startup overtakes Facebook’s reach and popularity (check out Snapchat’s bar in the spring of 2014 vs. Facebook’s, and then compare the companies’ 2015 bars). Unlike other businesses where incumbents are slowly disrupted and overtaken in decades-long processes, social media companies posses the (dis?)advantage of having a growth structure that is both asymmetric and exponential.

More simply: find me someone less than 18 years old today who still finds Facebook an important site to check on a daily basis and I’ll show you someone who hasn’t been exposed to the wave of new social media apps from just the last year alone.

The second opposition point makes, in reality, a whole lot of sense: Facebook will only drown when other startups sink if it has a huge exposure to these startups. And so the question is: does it?

Sheryl Sandberg has avoided that question every time she’s been asked it.

But in the fourth quarter, Facebook’s biggest advertiser was Wish. A startup that has taken in $578.8 million from investors.

So, does it?