
Why This Tech Bubble Is Worse Than 2000 - lilbarbarian
http://blogmaverick.com/2015/03/04/why-this-tech-bubble-is-worse-than-the-tech-bubble-of-2000/
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jonnathanson
Let's say, for the sake of argument, that the 225,000 angel investors the
author counts are all going bust. Their investments are illiquid and
effectively worthless. How is this scenario worse than that of the late '90s,
when the bubble affected the public market, and _millions_ of people's
investments evaporated overnight?

~~~
fredkbloggs
It isn't. In fact, it's almost certainly _better_.

All else being equal, the total loss to the economy when a doomed company goes
under is the same. If $50m was invested, that $50m has been lost, almost
always with nothing at all to show for it. Of course, if no debt was involved,
that money didn't go away, it just went somewhere else. Most likely, since it
was paid out as wages, that somewhere else was China.

The ability to sell a worthless security at a loss as opposed to holding it
until it is eventually canceled when the corporation is wound down does not
change this. All it does is spread the loss out: the first investor loses
whatever he put in less what he gets for the stock later, and whoever buys it
at that point eats the rest of the loss (or at least until she sells it at a
loss too, and so on). The total loss doesn't change; all that changes is the
distribution of losses across the economy.

However, it's not that simple. An IPO invariably entails the issuance of
shares that did not exist previously. That is, some portion of the raise is
new investment. When the company fails, all investment made in it is lost, so
any additional investment increases the total loss to the economy. So the
world actually becomes poorer when a company is able to go public before
failing (or, more broadly, each additional round of funding whether public or
private increases the total loss). The longer a bubble is allowed to inflate,
the greater the total loss to malinvestment.

So, is it better for 225k "qualified" investors to eat the entire loss, or for
several million retail investors to share in a somewhat larger loss? Your
answer probably depends on which you are. Overall, though, all that matters is
how much total investment was made in companies that fail without ever paying
a dividend.

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ThomPete
I still stand by my assertion that tech in general is undervalued but the VC
and angel investments are overvalued.

I think it's true that a lot of the so called startups are "just" app ideas
chasing user growth not actually businesses chasing profits.

The market only works if there is a constant liquidation of these startups
which means a way to check whether they are actually going to stand a chance
as independent companies making real money and sustaining it's own growth.

It doesn't work when the ponzi scheme that a lot of this looks like doesn't
have a way to do that but is purely based on the ability to secure next round
of funding.

The irony is that the world is filled with actual problems to solve, yet money
are getting thrown after young founders who might know how to get a lot of
followers but are really just tricksters finding ways to "growth hack" their
way to popularity.

Clayton Christensen was right after all. "Be patient for growth, not for
profit"

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mattzito
I think the reality is that there are a lot of angels that will lose a lot of
money on their investments. However, most of those angels are wealthy
individuals, and as a percentage of the total amount of investment capital
across all of the various investment opportunities in the market, it's still a
relatively small amount. Think of it like any other high-risk investment
vehicle.

For the crowdfunding equity part, I think that things like kickstarter are
vastly more pernicious - there's even less due diligence than there
potentially will be for crowdfunded equity. But also, if the amounts invested
really are $5k, $5k investments are not going to bankrupt people.

If we compare this versus the tech bubble in 2000, in that situation thousands
of people lost their jobs, and many people who were playing the stock market
lost a lot of money, regardless of whether they had liquidity or not.

So I guess it depends on your definition of "worse". I suspect that it's
"worse" for angel investors in that there are many more startups for them to
lose money in, but definitely not nearly as bad for the overall pool of people
who invest in companies.

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chaos_monkey
Isn't it kind of ironic that he says that people don't know what they're
getting into when they invest in small apps and tech startups, and then plugs
his own app startup at the end of the article?

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czzarr
No, it's not ironic, it's hypocritical at worst, and a coincidence at best.

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sctb
Previously:
[https://news.ycombinator.com/item?id=9147958](https://news.ycombinator.com/item?id=9147958)

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jhawk28
It is only worse for those people with enough capital to invest in the private
market.

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ruddct
Anyone have any evidence of traction for equity crowdfunding products? My
ignorance over anything, but I wasn't under the impression that these had
significant penetration (or penetration anywhere close to that of the tech
stocks in the late 90s)

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valarauca1
>You couldn’t go anywhere without people talking about the stock market.
Everyone was in or new someone who was in. There were hundreds of companies
that were coming public and could easily be bought and sold. You just pick a
stock and buy it. Then you pray it goes up. Which most days it did.

So people trading stocks without understanding the business or how the
valuation of _that_ stock was related to a core business. But simply pumping
money into a market causes a correction eventually right? To re-allign its
value against the _actual value_?

Nope wrong author goes on to talk about how tech business has imaginary worth.

~~~
fredkbloggs
The link between an asset's intrinsic value and its market value is elastic,
and the elasticity depends on how quickly the money supply grows and the
available rate of real returns elsewhere in the economy. In theory, a fiat-
based monetary system can have unbounded monetary growth; in such a system,
there is always a "greater fool" and the link to intrinsic value is broken
entirely. Not saying this is actually happening, only that it can; it's simply
the degenerate case of what we actually observe.

~~~
valarauca1
Your assertion requires an unbounded number of consumers, which last time a
check the population of the earth was still finite.

 _You can fool all of the people most of the time, and you can fool some of
the people all of the time, but you cannot fool all of the people all of the
time_ \- A. Lincoln

~~~
fredkbloggs
It does not. It requires only that they have an unbounded supply of money. The
price of an asset can be bid up indefinitely as long as there are at least two
traders with unlimited access to money.

~~~
valarauca1
So instead of an inifite number of consumers it requires 2x an inifite supply
of money.

How is this more likely? If you have inifite of something it by defination has
no value to you.

~~~
fredkbloggs
You don't. The way that the monetary system works in all developed economies
today is that you can borrow money into existence in order to purchase an
asset. The supply is not infinite, but it is always possible to create more.
That's reality, not a hypothetical. The hypothetical is that this could
continue without limit, regardless of asset prices. Thus far, in reality, that
growth has always been restricted at some point. There is no conceptual
requirement that it be so.

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shkkmo
This guy has no idea what is he talking about:

> there is no reason to believe that the SEC will be smart enough to create
> some form of liquidity for all those widows and orphans who will put their
> $5k into the dream only to realize they can’t get any cash back when they
> need money to fix their car

The current requirements for equity crowd funding include either 1 Million in
non-residential assets, or a reliable 200k annual income (based on 2 years of
income, and it's 300k if you have a spouse).

This is fear mongering plain and simple. Atleast until the SEC proposes
removing these requirements.

~~~
mapgrep
>The current requirements for equity crowd funding include either 1 Million in
non-residential assets, or a reliable 200k annual income (based on 2 years of
income, and it's 300k if you have a spouse).

Actually that's not the case under equity crowdfunding. You're citing the
definition of "accredited investor" in Regulation D of the Securities Act of
1933 (as amended in 1982); offerings to such investors have long had certain
exemptions from standard registration requirements (VCs generally use Reg D
exemptions, though obviously there were VCs long before Reg D).

You may be confused because title II of the JOBS Act pertained only to
accredited investors (it allowed "general solicitation" to such investors).

The whole point (arguably) of titles III and IV of the JOBS Act — the so
called "equity crowdfunding" titles — is that they allow investment by
unaccredited investors in certain offerings. Hence "crowd."

~~~
shkkmo
Ah, your are correct. I need to educate myself further.

I still maintain that this is a piece of fearmongering since I don't think
"widows and orphans" will have the 100k of annual income needed to invest 5k
via equity crowd funding. The author points the finger at the SEC without
going into any of the details about how the equity crowdfunding works.

I was confused because all of the crowd funding sites doing equity investing
that I have looked at still require accredited investor status. Are you aware
of any that are allowing investing under the new model?

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rwhitman
I find it curious that this is from a guy that stars in the world's most
popular reality TV show about angel investing. On one hand Mark Cuban is
introducing huge numbers of people to the world of angel investing, and on the
other... he's lamenting the follies of angel investors? Strange

But I think this post is more about Mark Cuban's not-so-hidden agenda with the
SEC. After making so many publicly awful _Shark Tank_ investments, there's no
doubt he'd want tools for making more of them liquid

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bigtunacan
With the kind of money he has, Cuban should know that Angel investing is
nothing new. I was part of a startup in the late 90s that was entirely funded
by angel investments. These private investments are just business as usual.
The only new thing is the organization of micro investment angels to allow
investment from people with less money. Personally I think those are a bad
idea and smart people would be better putting their money in an index fund,
but I'm not a big risk taker.

~~~
bigtunacan
Not sure what I said that got me a down vote, but just on the off chance it is
because I used the word "Cuban" and someone thought I was being racial... The
article was authored by Mavericks owner Mark Cuban.

Maybe it was something else I said, just not sure what.

~~~
irishcoffee
People have a habit of downvoting just because they disagree with what is
said, which is not the purpose of a downvote.

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Yhippa
Let's say what he says is true; the valuations are zero. The decreased
valuation of these companies have a chain effect but this time the contagion
is contained to the investors themselves. They took on all of the risk and
assuming they are private then they will take the hit as opposed to say
CALPERS customers.

Unless they got that money to invest from public sources.

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baldfat
> Because the only thing worse than a market with collapsing valuations is a
> market with no valuations and no liquidity.

> In the tech bubble it was Broadcast.com, AOL, Netscape, etc. Today its,
> Uber, Twitter, Facebook, etc.

Umm I think there certainly is value in Facebook and all their apps of
WhatsApp, Instagram and FaceBook. Just link bait article to me.

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quinnter
Yeah, how does Uber not have real value?

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jawns
You misunderstand.

> 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.

He's not saying that Uber, Twitter, and Facebook have no value. He's saying
that today's startups that are comparing themselves to these success stories
are drastically overvalued.

~~~
baldfat
He is says that most "Angel" investors have zero liquidity in their
investments.

> Because there is ZERO liquidity for any of those investments. None. Zero.
> Zip.

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clavalle
Hold on, why is there no market for sub $25m valued companies? How did the SEC
kill that market?

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bakhy
is it just me, or did this link kinda suddenly disappear from the first page
and land on the third?

