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Why This Tech Bubble is Worse Than the Tech Bubble of 2000

CatDevURandom 12y ago
Heaven forbid you read the comments section before the actual article. His point: >The bubble today comes from private investors who are investing in apps and small tech companies. ... >Why ? Because there is ZERO liquidity for any of those investments. None. Zero. Zip. Is he wrong?
- adventured 12y ago
  Yeah I think he just might be wrong. There wasn't previously a very good market for small and medium size investors to get near investing into early stage tech companies nationally. It has been a locked-away market. I know lots of people with single digit million dollar net-worths, none of them have a clue how to get close to interesting tech start-ups for investing purposes. How does a person from Nebraska, worth $5 million, invest into interesting tech start-ups in Seattle? Until now, that has been extraordinarily difficult, if not impossible. So now that there is a market for doing just that, why wouldn't prices rise on those investments? It makes perfect sense that they would, and should. Those valuations have been artificially repressed by government regulation. What Cuban is claiming is a bubble, is more likely in fact a market being unleashed where it was previously forbidden to exist by regulation. We're a long ways from the next Dr. Koop billion dollar valuation, with a $50+ million round of financing, coming out of crowd equity funding sites.
- cookingrobot 12y ago
  I think he's wrong. Because these are private investments without liquidity, that has prevented a bubble. You don't have people investing just to ride a rising wave and make profits from day trading. Investors this time have to actually look at the chances of the companies themselves, because they're only going to get a payday if the company is wildly successful, and nothing otherwise. If things start to slowdown, there probably won't be a sudden crash, because there's nothing to crash. These companies have ambiguous valuations, and there's no way to cash out, so there can't be a race to be the first to sell.
- hristov 12y ago
  Yes he is wrong. This is a non-sequitur. He is offering a conclusion that does not follow from his argument. Why should the lack of liquidity cause a bubble? Usually lack of liquidity acts in the opposite direction. It causes prices to go down not up. Furthermore, the bubble dynamic usually requires liquidity. The bubble dynamic happens when prices are going up so much that participants do not care about an underlying valuation but are certain they will be able to sell in the near future for a higher price due to the market momentum. This whole way of thinking, requires liquidity. If there is indeed a bubble, I do not see how it can logically be caused by lack of liquidity.
  - deleted 12y ago
    [deleted]
  - waps 12y ago
    This is a misunderstanding. Lack of liquidity can cause both. You forget that prices are valuations and are very different from prices actually paid. Simply put: 1) valuation = price of last share sold * number of shares 2) value = price at least one buyer is prepared to pay for the entire company Lack of liquidity in private companies generally comes from the fact that you can't buy or sell shares without agreement from the board. So "price of last share sold" is quite simply directly set by the board, people who have a vested interest in this number being as high as possible. It is normal for valuation to be larger than value (for public companies), but not by much. You could actually buy (very nearly) all of Microsoft for 360 billion dollars (it's market cap). A bubble can probably be best defined as valuation >> value.
im2w1l 12y ago
>If stock in a company is worth what somebody will pay for it, what is the stock of a company worth when there is no place to sell it ? A stock that is personal and non-transferable once bought, should probably be valued using discounted future dividends. Or discounted buy-out price.
weeksie 12y ago
"All those widows and orphans" Spare me. What are the numbers on those widows and orphans? Because the thing is, tech investment right now is driven by investors and funds—entities that by definition should be able to handle their losses. Entities that by definition are more educated about the downside risk than the tons of John Q Public idiots that were day trading Internet stocks back in 2000. Maybe the numbers support what he's saying. If they do, I'd love to see them. shrug
- hristov 12y ago
  You are absolutely right. I don't know what widows and orphans he is talking about, but it is very unlikely that anyone of the people pushing hundreds of millions of dollars into start-ups today has any problem affording repairs on their cars. He is making up a victim here.
  - Cacti 12y ago
    ... it's an expression, not a literal statement.
    - hristov 12y ago
      Yes, it is an expression usually used to refer to relatively poor innocent people. This does not apply here, poor people are not getting into the private funding rounds of top tier start-ups. So even if you use the expression figuratively, he is still making up a victim.
adventured 12y ago
Over the last three years Cuban has consistently, publicly said he doesn't see a bubble. Now he's seeing one derived from crowd funding? I'm not sure whether to think he's on to something, or whether he dislikes the idea of having vastly more competition for the sort of angel deals he frequently does. These new crowd funding sites are pushing up his cost to get into early rounds on good companies. There's no chance he likes seeing his entry fee substantially pushed upwards (lowering his returns); he has frequently pointed out how much he dislikes Silicon Valley's expensive early valuations and has proclaimed he views that as an isolated bubble.
- ChuckMcM 12y ago
  That confused me too. Almost as confusing as wealthy people complaining that seed rounds are "ridiculously overpriced". I share his concerns about "Crowd Funded Equity" because I think it creates an opportunity for fraud which are infeasible to preemptively defend against.
  - warfangle 12y ago
    > I share his concerns about "Crowd Funded Equity" because I think it creates an opportunity for fraud which are infeasible to preemptively defend against. Like penny stocks?
encoderer 12y ago
> Broadcast.com, AOL, Netscape, etc. Today its, Uber, Twitter, Facebook Even mentioning his company in the same breath as Uber, Twitter and Facebook shows how out of touch he is IMO. Broadcast.com was hardly a business! Those companies have BILLIONS of dollars of real revenue.
- ghshephard 12y ago
  I'd never heard of Broadcast.com before this post. Checking http://en.wikipedia.org/wiki/Broadcast.com http://en.wikipedia.org/wiki/Broadcast.com, I see that "In April 1999, Yahoo! acquired the company for $5.7 billion (or over $10,000 per user) in stock and renamed it Yahoo! Broadcast Solutions. The company had 570,000 users. " I"m comfortable calling that a Bubble.
  - damoncali 12y ago
    My God I feel old.
  - jff 12y ago
    $10,000 paid per user. Damn.
- edwinespinosa09 12y ago
  I noticed the boardcast plug but they did well at their IPO "It was 9 years ago we went public with what was then the biggest first day jump in stock price in IPO history" Relatively speaking for though AOL and Netscape at the time where not a bad analogy
- jeffreyrogers 12y ago
  You're cherry picking the quote: > In a bubble there is always someone with a “great” idea pitching an investor the dream of a billion dollar payout with a comparison to an existing success story. In the tech bubble it was Broadcast.com, AOL, Netscape, etc. Today its, Uber, Twitter, Facebook, etc. In context, what he's saying makes a lot of sense.
  - 12y ago
deeviant 12y ago
So the argument here is that the SEC should lessen investment restrictions so that VC's can pawn off their junk stock to the unsuspecting John Q. Public as soon as they see (and hopefully for them right before) the bubble pops?
- zenogais 12y ago
  That's what's really going on, it's a great way to make some quick money. But if you were to ask the standard free-market ideology side of it can always be mustered - "we're just trying to get the pesky and inefficient government out of markets so they can 'function better'", despite the efficacy such claims proving incredibly dubious over the last few decades and even more doubtful when empirically tested [1]. [1] http://www.amazon.com/The-Misbehavior-Markets-Financial-Turbulence/dp/0465043577 http://www.amazon.com/The-Misbehavior-Markets-Financial-Turb...
jemacniddle 12y ago
"In the tech bubble it was Broadcast.com, AOL, Netscape, etc. Today its, Uber, Twitter, Facebook, etc." Did he just compare himself to Uber and Facebook? Wow...
- jlisam13 12y ago
  no you are taking it out of context. Read : In a bubble there is always someone with a “great” idea pitching an investor the dream of a billion dollar payout with a comparison to an existing success story. In the tech bubble it was Broadcast.com, AOL, Netscape, etc. Today its, Uber, Twitter, Facebook, etc.
gmarx 12y ago
Pretty sure they were called "Angels" back then too
karmacondon 12y ago
This is why most angels have to be accredited investors, meaning that they need to have $1MM in assets. Millionaires investing in new ideas aren't exactly naive widows and orphans (though they could be). With public stocks there is indeed high liquidity, but there was also strikingly high volatility during the tech bubble. It's good to be able to sell your shares, but less so if the price can drop 80% in a day. That's when the common person gets hurt and the effects of a bubble are felt by the general public. Accreditation rules can seem unfair, but this scenario is exactly what they're designed to prevent. Crowdfunding is a whole different issue. Most crowdfunding campaigns trade products for money, not equity for money. Kickstarter campaigns tend to go bust frequently, but people don't invest their life savings in a crowdfunded project hoping to strike it rich. People with disposable income investing hundreds or thousand of dollars in an idea isn't a sign of a bubble. It might turn out to have deleterious long term effects, but, we'll see. Maybe I'm not understanding what Cuban is saying here, but it doesn't seem to make a lot of sense.
- edwinespinosa09 12y ago
  I think he was just pointing out a fact we might all know, that there is a sort of "investor bubble" that keeps getting feed by the good/big payouts. Then goes into a better model for inexperienced/new investors by "crowdfunding" Maybe he should have used another title :/
- imjk 12y ago
  Well he explicitly mentions equity crowd funding which allows people to bypass those rules. Also, from personal experience as an angel investor, there isn't really a great authority out there enforcing accredited investor requirements. All the times I've invested in private companies, I simply had to sign a one-page document self-proclaiming myself as an accredited investor.
  - itsallthesame 12y ago
    If you were to sign that document but not have the $1 million in assets to qualify as an accredited investor wouldn't you be committing some sort of securities fraud?
calcsam 12y ago
Some investors spin doom and gloom as an excuse to lowball entrepreneurs they're offering to invest in. Shark Tank is a pretty good example of this, even if Cuban's not the worst offender on there.
- joshu 12y ago
  That show drives me nuts. They take WAY too much equity unless they are doing heavy lifting (that is to say, as much as the extant founders.)
datashovel 12y ago
I get a sour taste in my mouth every time I hear wealthy people "looking out for" the small-time investor who may end up needing the money to fix their car after they've invested it. I would take a poor, but well-educated and well-informed investor in a transparent marketplace light years before I would blindly accept an arbitrary rule that states you can't invest your money where you want to just because you don't have enough.
sixQuarks 12y ago
I think Cuban is wrong. It's WORSE when ordinary investors are risking their money. Today, you've got angels and VCs that have risked their money. And this is money they don't need. Big deal if everything implodes, what do they lose? Simply their bets. Back in 2000s, a lot of ordinary people lost money they couldn't afford to lose.
- adventured 12y ago
  Yep, Cuban glosses over that obvious detail when it comes to median net worth individuals ($50k - $100k). Like when ordinary people invest into the stock market, and buy a company like Adept Technologies (ADEP) that goes from $21 to $6 in ten months (ADEP has been publicly traded for 20 years). Or buy into a company like Dendreon (DNDN) which goes from $40 / share and a ~$10 billion market cap, to literally worthless in 36 months. A person with $1,000 can easily lose all of it in the public markets. There's nothing stopping them from drowning in their own ignorance.
  - bluedevil2k 12y ago
    Someone in the public market could lose a lot, but they also have the option to sell at any time, preventing losses. Private markets with no liquidity will simply cause total loss, as selling is not even an option.
    - adventured 12y ago
      Being able to sell at any time is of course understood, and that in no way prevents the kind of ignorance that leads to total losses in the public market. Investors often ride investments down, telling themselves in a delusional fashion that their investment will turn around if they just hold out. This occurred rampantly during the collapse of the Nasdaq in 2000/01. Or companies like Bear Stearns or Lehman, that vaporized in a matter of weeks (Bear went from like $60 to $2 in two trading days), essentially completely wiping out public shareholders. Worldcom and Enron are other similar examples. It's also quite easy for investors to play with options in the public market and rapidly lose everything. All it takes is filling out one form.
Alex3917 12y ago
If the definition of a bubble is when people are knowingly making bad investments and counting on a greater fool, then if there is zero liquidity then that pretty much means that we can't be in a bubble.
- notahacker 12y ago
  He seems to be defining it a bubble as a category investment opportunities so overhyped that even people who don't understand liquidity pile in thinking they'll get a return, which isn't such a terrible definition. Though he doesn't help his argument by suggesting that well-networked angels are in the same category as equity crowdfunders pumping money into an idea and a 2 minute pitch video.
hristov 12y ago
So Cuban is essentially complaining that the market for small time ipos is dead. Maybe he is right, I do not know. But I am very much against any attempts to lessen the reporting requirements for IPOs. What people complaining about the SEC have to understand is that if the public lose trust in the markets, we will have absolutely no markets whatsoever. There will be no market for small caps or for big caps of for IPOs of any sizes. And we came perilously close to that with some of the big accounting scandals. The most important thing about the markets is that the public trusts them. If that creates accounting requirements that are too onerous for some small time ipos, so be it. Because if there is no trust, there are no markets and there won't be any small time ipos anyways.
grandalf 12y ago
The current heat in the startup market is largely due to the Fed pumping money into the economy by setting interest rates so low that large institutions can borrow nearly for free. While most of that money is going into less risky things like firms who are expanding rather than contracting thanks to the supply of capital, lax regulatory landscape, etc. The extra employment and associated consumer spending, along with the optimism obtained from a large number of people feeling like "owners" thanks to crowdfunding programs, helps create a culture of ideas and optimism. And of course if you're rich enough you want to have some money in some highly leveraged, risky bets, and so VCs and LPs are refining that market substantially, helping money flow into it efficiently. Mattermark is an example of serious analytics to help with deal flow that is growing in number of deals far out of proportion to the total dollar amount. Similarly, "financification" is happening in areas of real estate that have previously been slower markets driven by insider knowledge and minimal transparency. Financification is actually the broader trend. Companies like Mattermark realize that and are applying it to what they know (startups) but it's also being done at Farmlogs, Reonomy, and many, many others. Such businesses are pro-cyclical in that they lose value if deal flow slows, not to mention the inevitable liquidity assumptions that underly all such predictive analytics. I think that the financial instruments needed to truly make these things work medium term are obscure or even banned, so it will be interesting to see how that plays out.
austenallred 12y ago
So Cuban started (what became) Broadcast.com, ramped it up to $13.5 Million revenue per quarter [1], and sold it to Yahoo for $5.7 billion (in stock, but we'll disregard that fact for now). On track to do $54 million in a year, means he sold for 1,000x one year's revenue. 15 years later, Facebook brings in $3.2 Billion in revenue and has a market cap of ~$41 Billion, or about 12.8 times one year's revenue. [2] And we won't mention Google, despite the fact that they're the most obvious tech company to compare the likes of AOL to, because they make more money than God, and it would harm the argument. Uber, Twitter, etc. may be overvalued, but they bring in cold hard cash, and they're barely getting started. Things are frothy right now, for sure; there are some really high rounds being raised that are justified by portfolio theory, and some no-product seed rounds at really high valuations. There will be some major catastrophes, and people will lose a lot of money. But I have no idea how Cuban could possibly make the argument that it's worse than 1999. [1] http://en.wikipedia.org/wiki/Mark_Cuban#Business_career http://en.wikipedia.org/wiki/Mark_Cuban#Business_career [2] http://ycharts.com/companies/FB/market_cap http://ycharts.com/companies/FB/market_cap
- eroo 12y ago
  He isn't arguing firms are overvalued by a greater degree now relative to 1999. He's arguing that investments in private firms, which are far more popular now, are worse for small players due to their lack of liquidity. If things start going south in a private investment, a share holder may not be able to exit even at a large loss.
  - encoderer 12y ago
    If things start going south in a public investment, a shareholder may not be able to exit that, either. The truth is, it's all about liquidity, and liquidity dries-up on the way down.
    - eroo 12y ago
      Sure they can except in the most extreme corner cases. You an contrive situations in which it's difficult to sell stock on the NYSE or NASDAQ, but it's basically always quick and easy (e.g., you can move $100K of FB stock in seconds using your phone during just about any market hour and often even outside of them). That is definitely not true of private markets, at least at the moment.
DownvoteMeToWin 12y ago
I bet this is about liquidity. (reads article) Yep, it's about liquidity. I bet the HN comments don't mention liquidity categories. (reads comments) Nope, not a single one. How did I know!!!!??!!11 He's right that sub 25M is dead. You're either the next Uber or you're not getting anything. And if that's the case, then money will be on the sidelines waiting for the next big thing, not the next incremental thing. That will cause a shortage of liquidity for new proposals (the dreamers) and keep those capable of bigger proposals busy. (the titans) You will have a liquidity shortage for the dreamers. He is right. Incremental investment is no longer possible. All you have is a gigantic bar-to-entry for dreamers and when the titan shortage becomes apparent (no amount of liquidity will reveal more titans to keep the game going), the dreamers will be flushed out. A few titans might go down in the fallout as well. You either solve everything or nothing today. It's an untenable position that will keep liquidity on the sidelines and stifle innovation. It's also very bubbly as you have more money than there are opportunities (As classified by laws) to chase.
- fsk 12y ago
  His point is that Sarbanes-Oxley killed the possibility for small-medium companies to go public (~1B market cap). With less than $1B market cap, the overhead costs of Sarbanes-Oxley compliance are a huge % of revenue. The only way the shareholders can cash out is via a sale to a larger (idiot?) buyer (Facebook/Google/Microsoft/Yahoo). Even worse, a lot of these companies don't really have a clear path to revenue or profitability (like Tinder).
  - DownvoteMeToWin 12y ago
    Then you look at the cash reserves of the titans (Apple comes to mind) and you see it's not in circulation, which proves there are large sums of liquidity on the sidelines not investing.
    - daemin 12y ago
      Granted a lot of the money that these Titans have is actually spread all over the world and not in the USA (or Australia).
itsallthesame 12y ago
Could someone please point out something smart Mark Cuban has ever written? Because everything I read of his comes off as out of touch.
- mooredinty 12y ago
  I'm sure he's written a couple of checks that wouldn't be considered out of touch.
mbesto 12y ago
Until companies with serious cash to spend [0][1][2][3][4] stop buying up startups, this bubble won't end anytime soon. [0] - http://finance.yahoo.com/q/ks?s=UA+Key+Statistics http://finance.yahoo.com/q/ks?s=UA+Key+Statistics (just recently spent ~$900M on acquisitions) [1] - http://finance.yahoo.com/q/ks?s=MSFT+Key+Statistics http://finance.yahoo.com/q/ks?s=MSFT+Key+Statistics [2] - http://finance.yahoo.com/q/ks?s=GOOG+Key+Statistics http://finance.yahoo.com/q/ks?s=GOOG+Key+Statistics [3] - http://finance.yahoo.com/q/ks?s=ORCL+Key+Statistics http://finance.yahoo.com/q/ks?s=ORCL+Key+Statistics [4] - http://finance.yahoo.com/q/ks?s=EBAY+Key+Statistics http://finance.yahoo.com/q/ks?s=EBAY+Key+Statistics
eroo 12y ago
This isn't an indictment of valuations being necessarily inflated more than they were in 1999. He's critiquing a new preference for private investments which are very, very difficult to liquidate. That lack of liquidity, combined with easier access to investments via crowd funding has the potential to crash very similarly to mortgage backed securities. It's easy to get in and impossible to get out. If things start falling, investors are locked in for the whole ride down. That structure combined with a heady appetite for putting it in the first place primes the pump for a painful crash. [edit for question] He implies the SEC is restricting mechanisms for adding liquidity to private/crowd funded investments. Any idea if he has a specific proposal in mind?
cmacpher 12y ago
Only thing I agree on in this article is that equity based crowdfunding is a bad idea
deleted 12y ago
[deleted]
vonnik 12y ago
Cuban's weirdly wrong in several ways in his post. 2014 was the second biggest year in the history of the US stock market. More than 275 companies went public to raise more than $85B. In 2000, 406 companies raised about $96 billion. So sure, last year, there were fewer IPOs and they were on average larger than 2014. But this is not a sign of over-regulation. Heavy SEC regulations did not crush IPOs for SMBs. That's a knee-jerk blame government reaction that conveniently ignores the real reason why IPO-able companies don't go public much any more. They don't need to. Uber is a good example. Their Series E is coming in at over a billion. Historically, they would have had to turn to public markets for that money. But the JOBS Act actually made it possible for private companies to stay private a lot longer, because they are no longer penalized for granting stock to their employees, for example. Personally, I would overjoyed if it was impossible to sell crappy private companies' shares. That would limit the damage to the rest of the economy, but sadly that's actually not the case. SecondMarket, Exhilway private capital market, Campbell Lutyens, Cogent Partners, Probitas Ps and Triago all serve the secondary market for shares of private companies. If Cuban can't find a greater fool to snap up his shares, he's doing something wrong. There are plenty of venues to offload that stuff. Cuban also seems to misunderstand liquidity in public markets. Just because a company is listed on a public exchange doesn't mean its shares are liquid. There are many listed companies that see very little trading in their shares on any given day. And if their valuation tanked, for whatever reason, that limited liquidity would evaporate altogether. During the 2008 crisis, it was impossible to unload many companies' shares without making the price tumble. You just couldn't move a large block.
mooredinty 12y ago
I think he's conflating two very different problems. One is the issue about liquidity and the other is the so called tech bubble. The liquidity issue is real, market bubbles are not.
benoror 12y ago
"Everyone was in or new someone who was in"
sgonyea 12y ago
Wrong. Google, Apple, FB. They're all solvent as fuck. The VC blame is cute but if that bubble burst, those giants would inhale the wreckage in a heartbeat. This isn't a bubble. If VC momentum slowed or if wage growth slowed, that'd just mean that smaller places can finally hire people. A plateau is all you can expect to see, and that's just wishful thinking.
vfusion 12y ago
<em>If stock in a company is worth what somebody will pay for it, what is the stock of a company worth when there is no place to sell it ?</em> Well just get Cuban to tweet out that the stock is going to do good and it just might. Netflix was falling hard. Since Cuban's statement, it's gone up $133 or 39%. Coincidence?

Heaven forbid you read the comments section before the actual article. His point: >The bubble today comes from private investors who are investing in apps and small tech companies. ... >Why ? Because there is ZERO liquidity for any of those investments. None. Zero. Zip. Is he wrong?

adventured 12y ago
Yeah I think he just might be wrong. There wasn't previously a very good market for small and medium size investors to get near investing into early stage tech companies nationally. It has been a locked-away market. I know lots of people with single digit million dollar net-worths, none of them have a clue how to get close to interesting tech start-ups for investing purposes. How does a person from Nebraska, worth $5 million, invest into interesting tech start-ups in Seattle? Until now, that has been extraordinarily difficult, if not impossible. So now that there is a market for doing just that, why wouldn't prices rise on those investments? It makes perfect sense that they would, and should. Those valuations have been artificially repressed by government regulation. What Cuban is claiming is a bubble, is more likely in fact a market being unleashed where it was previously forbidden to exist by regulation. We're a long ways from the next Dr. Koop billion dollar valuation, with a $50+ million round of financing, coming out of crowd equity funding sites.
cookingrobot 12y ago
I think he's wrong. Because these are private investments without liquidity, that has prevented a bubble. You don't have people investing just to ride a rising wave and make profits from day trading. Investors this time have to actually look at the chances of the companies themselves, because they're only going to get a payday if the company is wildly successful, and nothing otherwise. If things start to slowdown, there probably won't be a sudden crash, because there's nothing to crash. These companies have ambiguous valuations, and there's no way to cash out, so there can't be a race to be the first to sell.
hristov 12y ago
Yes he is wrong. This is a non-sequitur. He is offering a conclusion that does not follow from his argument. Why should the lack of liquidity cause a bubble? Usually lack of liquidity acts in the opposite direction. It causes prices to go down not up. Furthermore, the bubble dynamic usually requires liquidity. The bubble dynamic happens when prices are going up so much that participants do not care about an underlying valuation but are certain they will be able to sell in the near future for a higher price due to the market momentum. This whole way of thinking, requires liquidity. If there is indeed a bubble, I do not see how it can logically be caused by lack of liquidity.
- deleted 12y ago
  [deleted]
- waps 12y ago
  This is a misunderstanding. Lack of liquidity can cause both. You forget that prices are valuations and are very different from prices actually paid. Simply put: 1) valuation = price of last share sold * number of shares 2) value = price at least one buyer is prepared to pay for the entire company Lack of liquidity in private companies generally comes from the fact that you can't buy or sell shares without agreement from the board. So "price of last share sold" is quite simply directly set by the board, people who have a vested interest in this number being as high as possible. It is normal for valuation to be larger than value (for public companies), but not by much. You could actually buy (very nearly) all of Microsoft for 360 billion dollars (it's market cap). A bubble can probably be best defined as valuation >> value.

im2w1l 12y ago

>If stock in a company is worth what somebody will pay for it, what is the stock of a company worth when there is no place to sell it ? A stock that is personal and non-transferable once bought, should probably be valued using discounted future dividends. Or discounted buy-out price.

weeksie 12y ago

"All those widows and orphans" Spare me. What are the numbers on those widows and orphans? Because the thing is, tech investment right now is driven by investors and funds—entities that by definition should be able to handle their losses. Entities that by definition are more educated about the downside risk than the tons of John Q Public idiots that were day trading Internet stocks back in 2000. Maybe the numbers support what he's saying. If they do, I'd love to see them. shrug

hristov 12y ago
You are absolutely right. I don't know what widows and orphans he is talking about, but it is very unlikely that anyone of the people pushing hundreds of millions of dollars into start-ups today has any problem affording repairs on their cars. He is making up a victim here.
- Cacti 12y ago
  ... it's an expression, not a literal statement.
  - hristov 12y ago
    Yes, it is an expression usually used to refer to relatively poor innocent people. This does not apply here, poor people are not getting into the private funding rounds of top tier start-ups. So even if you use the expression figuratively, he is still making up a victim.

adventured 12y ago

Over the last three years Cuban has consistently, publicly said he doesn't see a bubble. Now he's seeing one derived from crowd funding? I'm not sure whether to think he's on to something, or whether he dislikes the idea of having vastly more competition for the sort of angel deals he frequently does. These new crowd funding sites are pushing up his cost to get into early rounds on good companies. There's no chance he likes seeing his entry fee substantially pushed upwards (lowering his returns); he has frequently pointed out how much he dislikes Silicon Valley's expensive early valuations and has proclaimed he views that as an isolated bubble.

ChuckMcM 12y ago
That confused me too. Almost as confusing as wealthy people complaining that seed rounds are "ridiculously overpriced". I share his concerns about "Crowd Funded Equity" because I think it creates an opportunity for fraud which are infeasible to preemptively defend against.
- warfangle 12y ago
  > I share his concerns about "Crowd Funded Equity" because I think it creates an opportunity for fraud which are infeasible to preemptively defend against. Like penny stocks?

encoderer 12y ago

> Broadcast.com, AOL, Netscape, etc. Today its, Uber, Twitter, Facebook Even mentioning his company in the same breath as Uber, Twitter and Facebook shows how out of touch he is IMO. Broadcast.com was hardly a business! Those companies have BILLIONS of dollars of real revenue.

ghshephard 12y ago
I'd never heard of Broadcast.com before this post. Checking http://en.wikipedia.org/wiki/Broadcast.com http://en.wikipedia.org/wiki/Broadcast.com, I see that "In April 1999, Yahoo! acquired the company for $5.7 billion (or over $10,000 per user) in stock and renamed it Yahoo! Broadcast Solutions. The company had 570,000 users. " I"m comfortable calling that a Bubble.
- damoncali 12y ago
  My God I feel old.
- jff 12y ago
  $10,000 paid per user. Damn.
edwinespinosa09 12y ago
I noticed the boardcast plug but they did well at their IPO "It was 9 years ago we went public with what was then the biggest first day jump in stock price in IPO history" Relatively speaking for though AOL and Netscape at the time where not a bad analogy
jeffreyrogers 12y ago
You're cherry picking the quote: > In a bubble there is always someone with a “great” idea pitching an investor the dream of a billion dollar payout with a comparison to an existing success story. In the tech bubble it was Broadcast.com, AOL, Netscape, etc. Today its, Uber, Twitter, Facebook, etc. In context, what he's saying makes a lot of sense.
- 12y ago

deeviant 12y ago

So the argument here is that the SEC should lessen investment restrictions so that VC's can pawn off their junk stock to the unsuspecting John Q. Public as soon as they see (and hopefully for them right before) the bubble pops?

zenogais 12y ago
That's what's really going on, it's a great way to make some quick money. But if you were to ask the standard free-market ideology side of it can always be mustered - "we're just trying to get the pesky and inefficient government out of markets so they can 'function better'", despite the efficacy such claims proving incredibly dubious over the last few decades and even more doubtful when empirically tested [1]. [1] http://www.amazon.com/The-Misbehavior-Markets-Financial-Turbulence/dp/0465043577 http://www.amazon.com/The-Misbehavior-Markets-Financial-Turb...

jemacniddle 12y ago

"In the tech bubble it was Broadcast.com, AOL, Netscape, etc. Today its, Uber, Twitter, Facebook, etc." Did he just compare himself to Uber and Facebook? Wow...

jlisam13 12y ago
no you are taking it out of context. Read : In a bubble there is always someone with a “great” idea pitching an investor the dream of a billion dollar payout with a comparison to an existing success story. In the tech bubble it was Broadcast.com, AOL, Netscape, etc. Today its, Uber, Twitter, Facebook, etc.

gmarx 12y ago

Pretty sure they were called "Angels" back then too

karmacondon 12y ago

This is why most angels have to be accredited investors, meaning that they need to have $1MM in assets. Millionaires investing in new ideas aren't exactly naive widows and orphans (though they could be). With public stocks there is indeed high liquidity, but there was also strikingly high volatility during the tech bubble. It's good to be able to sell your shares, but less so if the price can drop 80% in a day. That's when the common person gets hurt and the effects of a bubble are felt by the general public. Accreditation rules can seem unfair, but this scenario is exactly what they're designed to prevent. Crowdfunding is a whole different issue. Most crowdfunding campaigns trade products for money, not equity for money. Kickstarter campaigns tend to go bust frequently, but people don't invest their life savings in a crowdfunded project hoping to strike it rich. People with disposable income investing hundreds or thousand of dollars in an idea isn't a sign of a bubble. It might turn out to have deleterious long term effects, but, we'll see. Maybe I'm not understanding what Cuban is saying here, but it doesn't seem to make a lot of sense.

edwinespinosa09 12y ago
I think he was just pointing out a fact we might all know, that there is a sort of "investor bubble" that keeps getting feed by the good/big payouts. Then goes into a better model for inexperienced/new investors by "crowdfunding" Maybe he should have used another title :/
imjk 12y ago
Well he explicitly mentions equity crowd funding which allows people to bypass those rules. Also, from personal experience as an angel investor, there isn't really a great authority out there enforcing accredited investor requirements. All the times I've invested in private companies, I simply had to sign a one-page document self-proclaiming myself as an accredited investor.
- itsallthesame 12y ago
  If you were to sign that document but not have the $1 million in assets to qualify as an accredited investor wouldn't you be committing some sort of securities fraud?

calcsam 12y ago

Some investors spin doom and gloom as an excuse to lowball entrepreneurs they're offering to invest in. Shark Tank is a pretty good example of this, even if Cuban's not the worst offender on there.

joshu 12y ago
That show drives me nuts. They take WAY too much equity unless they are doing heavy lifting (that is to say, as much as the extant founders.)

datashovel 12y ago

I get a sour taste in my mouth every time I hear wealthy people "looking out for" the small-time investor who may end up needing the money to fix their car after they've invested it. I would take a poor, but well-educated and well-informed investor in a transparent marketplace light years before I would blindly accept an arbitrary rule that states you can't invest your money where you want to just because you don't have enough.

sixQuarks 12y ago

I think Cuban is wrong. It's WORSE when ordinary investors are risking their money. Today, you've got angels and VCs that have risked their money. And this is money they don't need. Big deal if everything implodes, what do they lose? Simply their bets. Back in 2000s, a lot of ordinary people lost money they couldn't afford to lose.

adventured 12y ago
Yep, Cuban glosses over that obvious detail when it comes to median net worth individuals ($50k - $100k). Like when ordinary people invest into the stock market, and buy a company like Adept Technologies (ADEP) that goes from $21 to $6 in ten months (ADEP has been publicly traded for 20 years). Or buy into a company like Dendreon (DNDN) which goes from $40 / share and a ~$10 billion market cap, to literally worthless in 36 months. A person with $1,000 can easily lose all of it in the public markets. There's nothing stopping them from drowning in their own ignorance.
- bluedevil2k 12y ago
  Someone in the public market could lose a lot, but they also have the option to sell at any time, preventing losses. Private markets with no liquidity will simply cause total loss, as selling is not even an option.
  - adventured 12y ago
    Being able to sell at any time is of course understood, and that in no way prevents the kind of ignorance that leads to total losses in the public market. Investors often ride investments down, telling themselves in a delusional fashion that their investment will turn around if they just hold out. This occurred rampantly during the collapse of the Nasdaq in 2000/01. Or companies like Bear Stearns or Lehman, that vaporized in a matter of weeks (Bear went from like $60 to $2 in two trading days), essentially completely wiping out public shareholders. Worldcom and Enron are other similar examples. It's also quite easy for investors to play with options in the public market and rapidly lose everything. All it takes is filling out one form.

Alex3917 12y ago

If the definition of a bubble is when people are knowingly making bad investments and counting on a greater fool, then if there is zero liquidity then that pretty much means that we can't be in a bubble.

notahacker 12y ago
He seems to be defining it a bubble as a category investment opportunities so overhyped that even people who don't understand liquidity pile in thinking they'll get a return, which isn't such a terrible definition. Though he doesn't help his argument by suggesting that well-networked angels are in the same category as equity crowdfunders pumping money into an idea and a 2 minute pitch video.

hristov 12y ago

So Cuban is essentially complaining that the market for small time ipos is dead. Maybe he is right, I do not know. But I am very much against any attempts to lessen the reporting requirements for IPOs. What people complaining about the SEC have to understand is that if the public lose trust in the markets, we will have absolutely no markets whatsoever. There will be no market for small caps or for big caps of for IPOs of any sizes. And we came perilously close to that with some of the big accounting scandals. The most important thing about the markets is that the public trusts them. If that creates accounting requirements that are too onerous for some small time ipos, so be it. Because if there is no trust, there are no markets and there won't be any small time ipos anyways.

grandalf 12y ago

The current heat in the startup market is largely due to the Fed pumping money into the economy by setting interest rates so low that large institutions can borrow nearly for free. While most of that money is going into less risky things like firms who are expanding rather than contracting thanks to the supply of capital, lax regulatory landscape, etc. The extra employment and associated consumer spending, along with the optimism obtained from a large number of people feeling like "owners" thanks to crowdfunding programs, helps create a culture of ideas and optimism. And of course if you're rich enough you want to have some money in some highly leveraged, risky bets, and so VCs and LPs are refining that market substantially, helping money flow into it efficiently. Mattermark is an example of serious analytics to help with deal flow that is growing in number of deals far out of proportion to the total dollar amount. Similarly, "financification" is happening in areas of real estate that have previously been slower markets driven by insider knowledge and minimal transparency. Financification is actually the broader trend. Companies like Mattermark realize that and are applying it to what they know (startups) but it's also being done at Farmlogs, Reonomy, and many, many others. Such businesses are pro-cyclical in that they lose value if deal flow slows, not to mention the inevitable liquidity assumptions that underly all such predictive analytics. I think that the financial instruments needed to truly make these things work medium term are obscure or even banned, so it will be interesting to see how that plays out.

austenallred 12y ago

So Cuban started (what became) Broadcast.com, ramped it up to $13.5 Million revenue per quarter [1], and sold it to Yahoo for $5.7 billion (in stock, but we'll disregard that fact for now). On track to do $54 million in a year, means he sold for 1,000x one year's revenue. 15 years later, Facebook brings in $3.2 Billion in revenue and has a market cap of ~$41 Billion, or about 12.8 times one year's revenue. [2] And we won't mention Google, despite the fact that they're the most obvious tech company to compare the likes of AOL to, because they make more money than God, and it would harm the argument. Uber, Twitter, etc. may be overvalued, but they bring in cold hard cash, and they're barely getting started. Things are frothy right now, for sure; there are some really high rounds being raised that are justified by portfolio theory, and some no-product seed rounds at really high valuations. There will be some major catastrophes, and people will lose a lot of money. But I have no idea how Cuban could possibly make the argument that it's worse than 1999. [1] http://en.wikipedia.org/wiki/Mark_Cuban#Business_career http://en.wikipedia.org/wiki/Mark_Cuban#Business_career [2] http://ycharts.com/companies/FB/market_cap http://ycharts.com/companies/FB/market_cap

eroo 12y ago
He isn't arguing firms are overvalued by a greater degree now relative to 1999. He's arguing that investments in private firms, which are far more popular now, are worse for small players due to their lack of liquidity. If things start going south in a private investment, a share holder may not be able to exit even at a large loss.
- encoderer 12y ago
  If things start going south in a public investment, a shareholder may not be able to exit that, either. The truth is, it's all about liquidity, and liquidity dries-up on the way down.
  - eroo 12y ago
    Sure they can except in the most extreme corner cases. You an contrive situations in which it's difficult to sell stock on the NYSE or NASDAQ, but it's basically always quick and easy (e.g., you can move $100K of FB stock in seconds using your phone during just about any market hour and often even outside of them). That is definitely not true of private markets, at least at the moment.

DownvoteMeToWin 12y ago

I bet this is about liquidity. (reads article) Yep, it's about liquidity. I bet the HN comments don't mention liquidity categories. (reads comments) Nope, not a single one. How did I know!!!!??!!11 He's right that sub 25M is dead. You're either the next Uber or you're not getting anything. And if that's the case, then money will be on the sidelines waiting for the next big thing, not the next incremental thing. That will cause a shortage of liquidity for new proposals (the dreamers) and keep those capable of bigger proposals busy. (the titans) You will have a liquidity shortage for the dreamers. He is right. Incremental investment is no longer possible. All you have is a gigantic bar-to-entry for dreamers and when the titan shortage becomes apparent (no amount of liquidity will reveal more titans to keep the game going), the dreamers will be flushed out. A few titans might go down in the fallout as well. You either solve everything or nothing today. It's an untenable position that will keep liquidity on the sidelines and stifle innovation. It's also very bubbly as you have more money than there are opportunities (As classified by laws) to chase.

fsk 12y ago
His point is that Sarbanes-Oxley killed the possibility for small-medium companies to go public (~1B market cap). With less than $1B market cap, the overhead costs of Sarbanes-Oxley compliance are a huge % of revenue. The only way the shareholders can cash out is via a sale to a larger (idiot?) buyer (Facebook/Google/Microsoft/Yahoo). Even worse, a lot of these companies don't really have a clear path to revenue or profitability (like Tinder).
- DownvoteMeToWin 12y ago
  Then you look at the cash reserves of the titans (Apple comes to mind) and you see it's not in circulation, which proves there are large sums of liquidity on the sidelines not investing.
  - daemin 12y ago
    Granted a lot of the money that these Titans have is actually spread all over the world and not in the USA (or Australia).

itsallthesame 12y ago

Could someone please point out something smart Mark Cuban has ever written? Because everything I read of his comes off as out of touch.

mooredinty 12y ago
I'm sure he's written a couple of checks that wouldn't be considered out of touch.

mbesto 12y ago

Until companies with serious cash to spend [0][1][2][3][4] stop buying up startups, this bubble won't end anytime soon. [0] - http://finance.yahoo.com/q/ks?s=UA+Key+Statistics http://finance.yahoo.com/q/ks?s=UA+Key+Statistics (just recently spent ~$900M on acquisitions) [1] - http://finance.yahoo.com/q/ks?s=MSFT+Key+Statistics http://finance.yahoo.com/q/ks?s=MSFT+Key+Statistics [2] - http://finance.yahoo.com/q/ks?s=GOOG+Key+Statistics http://finance.yahoo.com/q/ks?s=GOOG+Key+Statistics [3] - http://finance.yahoo.com/q/ks?s=ORCL+Key+Statistics http://finance.yahoo.com/q/ks?s=ORCL+Key+Statistics [4] - http://finance.yahoo.com/q/ks?s=EBAY+Key+Statistics http://finance.yahoo.com/q/ks?s=EBAY+Key+Statistics

eroo 12y ago

This isn't an indictment of valuations being necessarily inflated more than they were in 1999. He's critiquing a new preference for private investments which are very, very difficult to liquidate. That lack of liquidity, combined with easier access to investments via crowd funding has the potential to crash very similarly to mortgage backed securities. It's easy to get in and impossible to get out. If things start falling, investors are locked in for the whole ride down. That structure combined with a heady appetite for putting it in the first place primes the pump for a painful crash. [edit for question] He implies the SEC is restricting mechanisms for adding liquidity to private/crowd funded investments. Any idea if he has a specific proposal in mind?

cmacpher 12y ago

Only thing I agree on in this article is that equity based crowdfunding is a bad idea

deleted 12y ago

[deleted]

vonnik 12y ago

Cuban's weirdly wrong in several ways in his post. 2014 was the second biggest year in the history of the US stock market. More than 275 companies went public to raise more than $85B. In 2000, 406 companies raised about $96 billion. So sure, last year, there were fewer IPOs and they were on average larger than 2014. But this is not a sign of over-regulation. Heavy SEC regulations did not crush IPOs for SMBs. That's a knee-jerk blame government reaction that conveniently ignores the real reason why IPO-able companies don't go public much any more. They don't need to. Uber is a good example. Their Series E is coming in at over a billion. Historically, they would have had to turn to public markets for that money. But the JOBS Act actually made it possible for private companies to stay private a lot longer, because they are no longer penalized for granting stock to their employees, for example. Personally, I would overjoyed if it was impossible to sell crappy private companies' shares. That would limit the damage to the rest of the economy, but sadly that's actually not the case. SecondMarket, Exhilway private capital market, Campbell Lutyens, Cogent Partners, Probitas Ps and Triago all serve the secondary market for shares of private companies. If Cuban can't find a greater fool to snap up his shares, he's doing something wrong. There are plenty of venues to offload that stuff. Cuban also seems to misunderstand liquidity in public markets. Just because a company is listed on a public exchange doesn't mean its shares are liquid. There are many listed companies that see very little trading in their shares on any given day. And if their valuation tanked, for whatever reason, that limited liquidity would evaporate altogether. During the 2008 crisis, it was impossible to unload many companies' shares without making the price tumble. You just couldn't move a large block.

mooredinty 12y ago

I think he's conflating two very different problems. One is the issue about liquidity and the other is the so called tech bubble. The liquidity issue is real, market bubbles are not.

benoror 12y ago

"Everyone was in or new someone who was in"

sgonyea 12y ago

Wrong. Google, Apple, FB. They're all solvent as fuck. The VC blame is cute but if that bubble burst, those giants would inhale the wreckage in a heartbeat. This isn't a bubble. If VC momentum slowed or if wage growth slowed, that'd just mean that smaller places can finally hire people. A plateau is all you can expect to see, and that's just wishful thinking.

vfusion 12y ago

<em>If stock in a company is worth what somebody will pay for it, what is the stock of a company worth when there is no place to sell it ?</em> Well just get Cuban to tweet out that the stock is going to do good and it just might. Netflix was falling hard. Since Cuban's statement, it's gone up $133 or 39%. Coincidence?