Amid the fallout from Facebook's IPO is renewed skepticism about its business model. What looked like a juggernaut when it first filed to go public is now besieged with questions about the effectiveness of its advertising and the impact of mobile computing.

Many of those same doubts apply to the cluster of social media and networking companies that went public over the past year. As well as the host of still private, second-tier social companies that are growing fast but generating little or no revenue.

That's stunning, really, because a year ago it seemed like the pending run of IPOs by social media and networking companies was poised to put to rest all those doubts about this sector's sustainability. Instead, they still face a fairly fundamental question: Can successful social media companies also be successful businesses?

"There was a perception just two weeks ago that when the big boy went public that it would mean these guys were all grown up," said Michael Pachter, an analyst at Wedbush Securities. "The share price pull back tells you investors are not convinced.

"These guys need to prove to investors that not only do we really have a wonderful product, but we know how to monetize it."

For the record, I believe that Facebook will become a monster of a business in the coming years. Its 900 million users are spending unprecedented amounts of time on the site, allowing the company to amass incredible data about their interests. And don't forget that the bulk of advertising still occurs offline, but is eventually expected to go digital, where Facebook is in a great position to capture a huge share.


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"Marketers want big audiences," said Tom Bedecarre, CEO of AKQA, a digital marketing firm. "And Facebook has the largest. I just think the most savvy digital people see the huge upside and potential for a platform like Facebook."

But many advertisers are still trying to figure out how to effectively leverage these audiences and demonstrate clear returns on their ad dollars. As a result, the jury on social media as a business is still out, especially where investors are concerned.

So what's happened is that even social superstars like Facebook, Zynga, Groupon, Pandora and Yelp have all seen their stocks trade well below their IPO prices. Martin Pyykkonen, an analyst with Wedge Partners, said investors are still trying to understand the fundamentals of these businesses, and it will likely take a couple years of strong earnings results for them to be persuaded.

"I compare it to Google's early days," he said. "We didn't know a whole lot about the business. And they didn't tell us a whole lot."

The lone standout in the social sector is LinkedIn, which remains close to double its IPO price. Investors seem to have a rosier view because LinkedIn is far less dependent on advertising, the mother's milk of just about every other Web 2.0 company.

I should note that this generation of startups has defiantly been in no rush to prove themselves as businesses. Almost all decided to build a really cool service that put the user first. Amass a gigantic audience. Figure out the business model later.

But having reached critical mass, these companies continue to struggle to convert such large numbers of users into a convincing business model. Yelp just posted a loss about three times as large as the same quarter a year ago in its first quarter as a public company. Analysts are split about whether Groupon can generate profits through its daily deals. The royalties Pandora pays for music cast doubt on its long-term survival.

Facebook stands above them all, both because its user base is many times larger and also because it generated $3 billion in revenue last year. But soon after filing its IPO papers, the buzz around its financials shifted from confirmation of its status as juggernaut to clues into its weaknesses. These fears were exacerbated by reports it was lowering its estimates for revenue this quarter and news that GM was pulling its ad spending on Facebook.

Debra Aho Williamson, principal analyst at eMarketer in Seattle, noted that when the firm published its most recent forecast for digital advertising back in February, it projected that Facebook revenue would probably double again this year to $6 billion, a number she said is likely now out of reach.

"Consumers have adopted social media a whole lot faster than advertisers," Williamson said. "It's taking them a lot longer to figure out how to fit social media into their plans."

Compounding the problem is that just as these companies have reached this point, the shift away from desktop PCs to smartphones and tablets seems to be accelerating. And for the most part, their business models are not nearly as effective in the mobile realm, generating little or no revenue.

"Mobile comes along and everything they built doesn't fit like a glove," said Keith Teare, founder of Archimedes Lab, an incubator focused on mobile technologies. "That was OK when it was a dribble. But it seems to have grown into a torrent."

If anyone is going to figure this out, though, I'm betting on Facebook. I think investors are overreacting to its current revenue estimate changes. Plus, it did just raise a big chunk of money it can use to invest in its business and acquire others.

"I go back to the fundamentals," said Charlene Li, founder of the Altimeter Group. "Is the company profitable? Yes. Does it have very enthusiastic cutomers? Yes. Look, people have been predicting the death of Facebook for five years. But I've never seen a company reinvent itself as successfullly as Facebook has again and again."

But here's a scary thought: What if Facebook can't turn social into a robust business? What hope is there for a company like Twitter, which has far fewer users and much weaker data? And what about up-and-comers like Quora or Pinterest?

These companies can't run on enthusiasm forever. If they sputter, they'll likely be gobbled up by larger companies like Google and Microsoft. Or in some cases, they'll fade away.

Either way, social needs to prove its value as a business soon. Otherwise, the era of Silicon Valley that spawned a social media revolution will mainly be remembered for producing a Lost Generation of Startups.

Contact Chris O'Brien at (415) 298-0207 or cobrien@mercurynews.com. Follow him on Twitter at obrien and read his blog posts at http://www.siliconbeat.com.