Billionaire and lead owner of NBA team Dallas Mavericks, Mark Cuban, warned of the tech bubble that will devour private investors lured to invest in apps and small tech companies. He warned that, just like the 2000 tech bubble courtesy of Broadcast.com, AOL, Netscape and the likes, today’s bubble will be brought by Uber, Twitter, Facebook and similarly structured websites, primarily apps and tech startups selling shares for investment.
Cuban became a legendary figure in the tech sector when he took advantage of the dot-com boom of the 1990’s. He then sold webcasting service Broadcast.com to Yahoo! for $5.7 billion in exchange for the latter’s stock in 1999. Between 2000 and 2001, the dot-com market went busted.
He said the bubble bound to happen is similar to the one in 2000. Back then, the bubble was found in public Internet websites; today, it is within small apps and tech startups.
“If we thought it was stupid to invest in public internet websites that had no chance of succeeding back then, it’s worse today,” Cuban wrote in his blog.
“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. To the investor, it’s the hope of a huge payout,” Cuban wrote.
Back then, they were small investors. Now, they are called Angels, crowd funders. Cuban said they are called as such because they grant investment wishes from private companies selling shares for apps and startups.
Cuban said Angel investments offer zero liquidity, especially with SEC’s new Equity Crowd Funding Rules. Simply put, according to Cuban, these new rules made sure there is no market for any of these apps and tech startups to go public and create liquidity for Angel investors. This had made the impending bubble far worse than what happened in 2000, Mark Cuban warned.
“Because the only thing worse than a market with collapsing valuations is a market with no valuation and no liquidity,” Cuban highlighted.
“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?” he concluded.
Elsewhere, analysts also see the looming bubble.
Definitely in a Bubble
Citing data obtained from CB Insights, Bloomberg reported there are more than 50 tech startups that have reached a valuation of $1 billion just within the past two years. Cases in point: Airbnb reached a valuation of more than $20 billion, Snapchat is on its way to hitting $19 billion, and Pinterest is increasing financing at a valuation of $11 billion.
“We are definitely in a bubble,” Todd Dagres, founding partner of venture capital firm Spark Capital, told Bloomberg.
“We are not in a valuation bubble, as the mainstream media seems to think. We are in a risk bubble,” Bill Gurley, a partner for Benchmark in Menlo Park, pointed out.
“For some of these companies, it is hard to imagine a successful exit,” Mark Cannice, University of San Francisco’s professor of entrepreneurship and innovation, told Bloomberg.