Billionaire investor Mark Cuban, the outspoken owner of the Dallas Mavericks, posted a warning of sorts on his weblog about why the current tech bubble is worse than the last dotcom bubble of 2000. In his piece, he compares investors from then and today, highlighting one critical factor for why when the bubble bursts — and it will burst — investors will be left worse off for having invested in the startup scene: liquidity.
The startup craze has been burning for a while now. Entrepreneurs are still springing up with any and all business ideas in the hopes of attracting a million-dollar investment from an investor or venture capitalist. Investors are caught up in the fever too and have been criticized for jumping in bed with companies before they’ve demonstrated profitability in the hopes they will grow to be the next Uber or SnapChat. When the bubble bursts, entrepreneurs and their startups will immediately become dust in the wind along with the billions invested. That’s the most dangerous part about investing in startups according to Cuban.
“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 it is Uber, Twitter, Facebook, etc.”
Cuban makes the comparison that investors in the stock market in 2000 at least invested in public companies with sellable shares, while much of the billions being invested today are in companies that still remain private, with those investors known as angels.
“People we used to call individual or small investors are now called Angels. Angels. Why do they call them Angels? Maybe because they grant wishes? According to some data I found, there are 225k Angels in the US. As in the crazy days of the internet boom, I wonder how many realize what they have gotten into.”
If the startups angels have invested in tank, there will be no recouping their losses. Over the last 15 years, the bets have only gotten bigger, riskier and more permanent, but not just for those who have a lot of money to invest. Cuban outlined another currently popular scheme — the one that calls for gullible hopefuls to crowdfund their bets.
“For those who can’t figure out how to be Angels. You can sign up to be part of the new excitement called Equity Crowd Funding. Equity Crowd Funding allows you to join the masses to chase investments with as little as 5k dollars. Oh the possibilities!”
No matter how much you believe the words of Mark Cuban, investing in startups is not the road to success many dream it to be. After all, 90% of startups fail, but you already knew that.
“I have absolutely no doubt in my mind that most of these individual Angels and crowdfunders are underwater in their investments. Absolutely none. I say most. The percentage could be higher.”
Cuban makes a good point on the volatility of investing in startups — most fail, and once you put your money in them, consider it burned until that company might one day (but probably not) grow into something bigger and more profitable over the next several years. Does that not sound like a bad, idiotic investment to you?
“So why is this bubble far worse than the tech bubble of 2000? Because the only thing worse than a market with collapsing valuations is a market with no valuations and no liquidity.”
Does the “Shark Tank” judge have a point? Or is he just blogging with a chip on his shoulder?