Mark Cuban, famed Internet bubble beneficiary, Dallas Mavericks owner, and willing pundit, posted on his blog a couple of days ago about the new bubble in early stage assets.
Here’s your LINK
Cuban makes a compelling case that the current frenzy of investment in early stage companies (especially apps and small tech companies) is actually worse than the year 2000-era tech bubble.
Because there are far fewer options for liquidity for the types of early stage investments that are dominating today; and there is a far more diverse investor base putting money at risk.
He sets up the situation with this 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.”
Interestingly, Cuban lists Broadcast.com… That caught my eye.
When a billionaire puts the source of his vast wealth on a list of companies that perhaps just maybe were sold based on a pitch and a dream, it catches my attention. He actually overcomes the cognitive dissonance induced justification of how his own company was different; and just throws it in the street right alongside Netscape.
He then goes on to lament how the average Joe and Jane are now part of the angel investment crowd. He explains how they have access to illiquid investments through angel investments and crowdfunding that they would not have had 15 years ago.
And he thinks it’s a bad thing. His quote:
“All those Angel investments in all those apps and startups. All that crowdfunded equity. All in search of their unicorn because the only real salvation right now is an exit or cash pay out from operations. The SEC made sure that there is no market for any of these companies to go public and create liquidity for their Angels. The market for sub 25mm dollar raises is effectively dead. DOA . Gone. Thanks SEC. And with the new Equity CrowdFunding rules yet to be finalized, 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”
It’s an interesting read.
Informed consent is a big deal. When people have access to illiquid and extremely high risk investments, they have to know what they are getting into. The implication here may not be so much that public valuations are totally out of whack, but rather that there is a shadow bubble of money being thrown at “big things” that come in illiquid packages.
I think Mark Cuban has hit on one of the dark sides of the democratization of capital allocation.