
Why This Tech Bubble is Worse Than the Tech Bubble of 2000 - edwinespinosa09
http://blogmaverick.com/2015/03/04/why-this-tech-bubble-is-worse-than-the-tech-bubble-of-2000/
======
austenallred
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
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
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
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.

~~~
encoderer
Next time the market is in melt-down mode -- like it was just beginning to be
last October -- watch how wide the spread gets. Sure, if you're somebody
willing to take any price in a fire sale you can get out of anything.

~~~
eroo
I'd consider that a corner case. And even then, it is possible to get
something out. With private investments, that just may not be true or involves
high ad hoc transaction costs.

My original reply was intended to point out that what was the top article
comment at the time _completely_ missed the point. Cuban is arguing that
severe liquidity restraints are bad, especially so for small time investors.
For scenarios like you describe, public exchanges aren't perfect either, but
they are very, very good at facilitating near-instantaneous liquidity and they
strictly dominate the current set of private crowd funding vehicles.

------
sixQuarks
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.

~~~
dogma1138
VC's are not risking their money they are risking yours. VC's get money from
your insurer, pension provider, 401K and similar saving options. While you
might invest and gamble with your own money, VC's are literally gambling with
everyone's future. And these days the regulations limiting insurance companies
and private pension providers in investing their money in a VC or other types
of risky capital are looser than ever.

While I won't to pretend to understand the details behind the article, but
just looking at the many "startups" without a clear business plan, revenue
stream not to mention profits which are valued in billions of dollars all of a
sudden should make everyone's eyebrows rise if just a little.

10-15 years ago if you made an exit in 100's of millions it would be a
worldwide sensation, these days it seems you sneeze and get 100M in funding
and the WSJ posts an article about your company being valued higher than the
GDP of some developing nations.

I remember when in the mid 90's Checkpoint got like 70M $ in it's NASDAQ IPO
which was then a sensation which was talked about for year, these days that's
considered a cold round 2 funding run for the next sexting app. Even with
"inflation" and all that other nonsense the fact that since 2006-2007 you
could probably count at least 40 US techstartups which got valued for over
1bln should hint a that something stinks.

Heck evernote which their current business model seems to be more focused
around selling 70$ socks and 200$ messenger bags instead of you know their own
actual techonlogy is valued these days at what 4-5bln, really? A company with
18M in yearly revenues after almost 8 years with no real assets to speak off,
with a user base smaller than even marginally popular online games with almost
no profit that hasn't even returned it's initial investment runs is valued at
300 times their pre-tax income?

~~~
sixQuarks
Pension funds and similar investment vehicles put a tiny percentage of their
money into VC funds. Those losses shouldn't affect the individuals much.

~~~
dogma1138
[http://www.bloomberg.com/bw/articles/2014-09-23/are-
public-p...](http://www.bloomberg.com/bw/articles/2014-09-23/are-public-
pensions-inflating-a-venture-capital-bubble)

Insurance companies and pension funds make up 50% and upwards of an average
VC. The rest of the money also comes from sources which directly affect you
such as local government, banks, and other "public" institutions. "Rich
individuals" on the other hand do make up only a fraction of the VC source
funding with less than 2% on average.

And while it's true that it doesn't represent the portion of the money a
pension fund has invested in a specific VC. If you look at the breakout of
your pension fund you'll find just how ridiculously high that percentage
actually is. And BTW an insurance company or a pension fund that gets hit with
even 5-10% loss means that tons of people lose coverage, premiums sky rocket
and you end up losing more money that you could invest yourself otherwise.

~~~
sharkweek
CalPERs only allocates ~1% to VC (still billions). VC is actually a pretty
soft risk in the big picture of their private allocations:

[https://www.calpers.ca.gov/eip-
docs/investments/policies/inv...](https://www.calpers.ca.gov/eip-
docs/investments/policies/inv-asset-classes/pe/pe-prog.pdf)

~~~
dogma1138
It's their target not sure if those are actually the figures because in 2014
they were to scale from 7 to 1% in 5 years. There's info on that in the
article. It was also not because of risk but because of low returns.

Besides public funds you also have corporate and private funds which also risk
a huge portion of their money in risky capital not only VC.

------
weeksie
"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
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
...

it's an expression, not a literal statement.

~~~
hristov
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.

------
grandalf
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.

------
adventured
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
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
> 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?

------
karmacondon
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.

~~~
tosseraccount
accredited investors?

Who accredits investors?

Is there legal status for this?

~~~
adventured
Yes. It varies by country of course.

"In the United States, for an individual to be considered an accredited
investor, they must have a net worth of at least one million US dollars, not
including the value of their primary residence or have income at least
$200,000 each year for the last two years (or $300,000 together with their
spouse if married) and have the expectation to make the same amount this
year.""

[http://en.wikipedia.org/wiki/Accredited_investor#United_Stat...](http://en.wikipedia.org/wiki/Accredited_investor#United_States)

------
encoderer
> 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
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
My God I feel old.

------
datashovel
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.

------
eroo
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?

------
deeviant
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
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-
Turb...](http://www.amazon.com/The-Misbehavior-Markets-Financial-
Turbulence/dp/0465043577)

------
calcsam
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
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.)

------
vonnik
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.

------
hristov
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.

------
CatDevURandom
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?

~~~
hristov
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.

~~~
waps
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.

------
jemacniddle
"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
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.

------
mbesto
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)

------
Alex3917
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
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.

------
gmarx
Pretty sure they were called "Angels" back then too

------
itsallthesame
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
I'm sure he's written a couple of checks that wouldn't be considered out of
touch.

------
im2w1l
>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.

------
mooredinty
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.

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

------
benoror
"Everyone was in or _new_ someone who was in"

------
DownvoteMeToWin
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
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
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
Granted a lot of the money that these Titans have is actually spread all over
the world and not in the USA (or Australia).

