I don't think that's the point. Uber is just going to decrease in value to some extent if the bubble bursts. Some companies, like amazon, survived the dot.com and became a phoenix. Uber would likely do the same, but it would just face some adversity in a turbulent credit market, maybe have to IPO earlier than it would like, etc.
> 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.
The value of FaceBook acquisitions like WhatsApp and Instagram is somewhat recursive though, having been set by Facebook itself when it purchased them mostly based on the value of its own stock (itself a bet on future profits).
I agree, it seems a bit like link bait. From what I understood, though, the author's point has some merit -- in stocks, you are at least always able to cash out, to change your mind, to have new priorities. In the modern form of start-up investing, your fate becomes inextricably bound with that of the start-up, with your only options being an eventual pay-out or loss of your investment. I'm not saying I think this indicates anything about a "bubble," just that (if I understood the article correctly) there is a distinct difference between the value modern start-ups provide and the value that a public investment provides.
You are basically talking about risk vs. reward, and bring up an interesting point. In the original tech bubble of 2000 the broad market ended up participating in highly risky investments without fully understanding the risk because every company was IPOing.
It is a much different environment today where the majority of the very high early risk is being shouldered by private investment. IMHO, this is how it should be and in no way is nearly as bad as the 2000 bubble.
Why wouldn't anyone consider it a success? Broadcast.com was streaming movies in the 90s! It was way ahead of its time. Unfortunately Yahoo squandered it (and Cuban himself thought it was a dead-end business, oh how he was wrong).
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)
>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.
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.
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
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.
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.
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?
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.
Back in the dotcom days the IPO was the finish line, but recently the fashion seems to be raising greater and greater sums in private investment rounds, particularly for "businesses" that build up an audience first and figure out monetization later.
So instead of the many stock market investors (individuals, pension funds, hedge funds, banks, etc) getting burned, it is the much smaller pool of angels and VCs who would pass the credit/equity crunch to startups. The loss of wealth wouldn't be as widespread as before, but it would throw a wrench into one of the few genuinely competitive industries in the U.S. today.
There is reason to be concerned, but I think the author's fears are somewhat overblown.
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.
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?
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.
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.
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.
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"
> 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.
>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."
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?
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
39 comments
[ 0.33 ms ] story [ 88.4 ms ] thread> 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.
> 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.
> Because there is ZERO liquidity for any of those investments. None. Zero. Zip.
Gross Profit
2014 - 12.47 B
2009 - 330 M
Net Profit
2014 - 2.94 B
2009 - 229 M
It is a much different environment today where the majority of the very high early risk is being shouldered by private investment. IMHO, this is how it should be and in no way is nearly as bad as the 2000 bubble.
Yes, nobody except Mark Cuban would consider broadcast.com a success story, but if I got rich off selling a company, I'd consider it a success too.
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.
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
How is this more likely? If you have inifite of something it by defination has no value to you.
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.
So instead of the many stock market investors (individuals, pension funds, hedge funds, banks, etc) getting burned, it is the much smaller pool of angels and VCs who would pass the credit/equity crunch to startups. The loss of wealth wouldn't be as widespread as before, but it would throw a wrench into one of the few genuinely competitive industries in the U.S. today.
There is reason to be concerned, but I think the author's fears are somewhat overblown.
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.
Maybe it was something else I said, just not sure what.
Unless they got that money to invest from public sources.
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"
> 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.
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."
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?
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