Facebook insiders have been selling their stock. Top level insiders such as directors from venture funds invested in Facebook, key executives and even Mark Zuckerberg himself have been quietly trying to unload some shares in private sales. These private transactions are not uncommon as startup entrepreneurs and their backers are often in search of some liquidity. What makes these particular transactions interesting are the implied values being negotiated.

When Microsoft (MSFT) bought a small stake in the wildly popular social network, the price paid implied an overall value of $15 billion. The rumored prices at which Facebook insiders are trying to unload some shares carry an implied overall value of as low as $3.75 billion to $5 billion.

It is clear that Facebook currently cannot be worth $15 billion. The Facebook Apps platform that attracted so much attention from independent software developers has lost a lot of momentum. Independent developers who invested a lot of time, money, and energy into creating Facebook Apps have found it increasingly difficult to attract a significant audience. While finding users has been tough, monetizing their creation has proven to be a Herculean task. Special venture funds created to fund Facebook apps have not been able to deploy much of their capital as most Facebook apps are ill-conceived or frivolous with no clear business model. I would return that money to limited partners rather than hope a genius comes along to battle for market share owned by early movers like Slide and RockYou!

Advertising, the main business model of free social networking platforms, continues to disappoint, with click-through rates and conversion rates declining alarmingly. While international growth remains strong, domestic growth is decelerating noticeably. This could be spun as a positive, but I don’t think the youth of other countries have spending power approaching anywhere near that of American youth.

Will this mark the end of the current cycle of funding exuberance on the part of venture capital firms for all things Web 2.0 or social? The pace of venture funding in this sector of the Internet really picked up when Myspace sold for close to $600 million to News Corporation (NWS-A). Since then, millions have been poured into all flavors of social networks and social networking apps. It reminded me of the fin de siècle bubble that burst so painfully for all involved. Below is an essay I wrote for an investment letter published in June 2007 distributed high net worth clients.

Irrational Exuberance 2.0

We are not calling a bust of the current bull market. As much as we admire Barron’s editor Alan Abelson’s wit and literary style, we are cognizant of the ravages that might befall our track record if we were permanent bears. Still, we can’t help but imitate his dour tone of the 1990s when he repeatedly called too early for the bursting of the dot com bubble. Mr. Abelson eventually got it right when we entered the new century and collectively blinked at the stratospheric levels we had taken the market to. Then as now, venture capital funding of cockamamie business ideas served as a reliable indicator of an impending rinsing out of “frothiness.”

As we once again witness new highs in the stock market, it may be wise to examine the shenanigans our friends in the venture capital world are participating in. Are they helping to start companies “built to last” or are they throwing money at silly business ideas “built to be sold?” After a quick survey of recent startup financings, we think a strong sense of déjà vu might visit us.

While yesteryear’s absurd venture deals were justified as the obsolescing of brick and mortar business models by an online nirvana fueled by UPS (UPS) and FedEx (FDX) trucks, today’s venture activity centers around “social networking” and the wisdom and power of crowds, also known as Web 2.0 in geeky circles.

Take NaturallyCurly.com for example. It proclaims itself as the social network for people with curly hair. Purportedly, individuals with curly locks need an online support network for all their hair maintenance difficulties. Don’t forget the most important feature of any social networking community, the ability to make friends with similar interests. We delight at the prospect of spending all our time discussing hair. A technology industry veteran who sold his company to Compaq invested $600,000 into this dandy of a site.

A little less silly but nonetheless vacuous is a website called Flixster. This is the social network for all things cinematic. Users rate movies, join fan clubs celebrating famous thespians, read up on news regarding upcoming films, and make friends.

Websites that allow people to rate movies and chat about their favorite scenes already exist. They just don’t allow people to make friends. This ability to make online friends convinced Lightspeed Ventures, a very reputable venture capital firm, to invest around $2 million into Flixster.

If the dollar amounts involved look nothing like the wasted mega-millions of the late 1990s, we present Geni.com, a website for constructing family trees. The premise revolves around getting relatives to help by emailing them a digital “widget” with which they could plug themselves in the appropriate branch of the family tree. It is the wisdom of crowds, albeit a familial one here, that makes this a very compelling idea indeed. Unfortunately, it occurred to us that great great great grandpa Bob of many years before cannot respond by email from Heaven. That did not prevent Charles River Ventures from injecting $10 million for 10% of the company, effectively valuing the then seven week old company without any revenues at $100 million. We believe the large valuation might have something to do with being able to turn relatives into online friends.

The Big Bang that gave rise to all this Web 2.0 insanity occurred when Rupert Murdoch’s News Corporation bought the top dog of all social networks, Myspace, for $580 million. Users of Myspace could create their own web pages and browse around the online community to make friends. Google (GOOG) soon followed by buying YouTube for $1.6 billion. YouTube users upload their homemade videos for the whole world to watch. One of the key principles of Web 2.0 is getting the community to contribute user-created content. Did we mention that YouTube users could also make friends with fellow wannabe Spielbergs?

Almost overnight, lemming-like venture capitalists funded dozens of Myspace clones with typically cute techie names like Tagworld, Bebo (TWX), Facebook, Facebox, Multiply, and Gather. Of course, all of these allow users to make friends.

YouTube copycats receiving venture funding include Veotag, Kyte, Mogulus, VideoJug, YeboTV, and Brightcove. Although we haven’t used these sites personally, we’re quite sure you could make friends on all these websites. How many News Corporations and Googles remain to stuff the coffers of venture firms by buying their portfolio companies? It seems as if entrepreneurs and venture capitalists in this space are banking on many more buyouts to come.

It isn’t just the private venture capital world that has fallen to the seduction of easy profits. When flimsy businesses with short operational histories try to tap the capital markets by going public through an initial public offering and find a receptive market, we are treated to such delicious examples as GoFish (GOFHE.OB) , a video sharing website in the spirit of YouTube. Debuting last October on the over-the-counter “bulletin boards”, the fishy company achieved a peak market cap of $147 million. With only $45,580 in revenue and no profits to speak of, investors in GoFish are swimming in a foamy sea of hope and greed.

Our favorite new social network? Stockalicious, a website that allows users to keep track of their portfolios and compare their performances against the market and each other. We wonder if Alan Abelson might jump on the Web 2.0 bandwagon and become a member of this Internet community. We could sure use a friend or two.