Mark Cuban made his fortune (well, his second bigger fortune) during the first tech bubble (some call it the internet bubble) when he sold Broadcast.com to Yahoo for $5.4 billion in stock. The real financial genius of Mark Cuban turned out to be not so much in the founding and selling Broadcast.com, but in quickly and effectively diversifying his investments (including all that Yahoo stock) before the bottom fell out of the internet bubble.
Is 2015 a Tech Bubble?
There have been a lot of people wondering for a few years now if technology is once again in a bubble. You’ve seen the big headlines, of course. Facebook bought Instagram for a billion dollars. Yahoo paid over a billion dollars for Tumblr (even though the company was probably quickly running out of money). These days, having a zero revenue company purchased for a billion dollars is commonplace. The idea is that somehow, someway, those users are worth money, even if the current company has no idea, or even plans, to make any revenue off of them.
In many ways, this is like the stock market bubble that built up in the late 1990s, when any website was considered a good investment candidate for an IPO even when they had zero earnings, and often staggering annual losses. The money will come, somehow, someway, the conventional wisdom said.
The parallels are definitely there.
There is one very big difference between the internet bubble and today’s technology bubble, and according to Mark Cuban this makes this tech bubble worse than the first one.
The difference is that in 90s, companies went PUBLIC, that is sold stock in an IPO for huge money even when they had no profits. It happened over and over again with dozens (hundreds?) of IPOs per year. Analysts that cautioned investors were cast aside, while analysts who said stocks would always go up, where heralded as the real soothsayers of Wall Street.
Today, that isn’t quite what is happening. While some companies are going public without profits, it is a handful of companies each year. Some, like Twitter seemed on the verge of profitability when they went public. Others, like Zynga, went public with profits that couldn’t be sustained. But, there are virtually no companies going public with nothing more than an idea.
To find today’s bubble in technology you have to look at the poorly understood (from the outside at least) world of private investing. In this bubble, there are no publicly traded companies, no shares of stock to buy in your Fidelity or eTrade account. Instead, the investors are the seemingly endless supply of venture capital firms, angel investors, and others who invest in various seed rounds with developing companies. These companies then use that venture capital to fund their operations in order to grow into something big enough to be acquired by Facebook, Yahoo, Google, or Microsoft. The idea of revenues, profit, or even going public, is simply not on the radar.
What Mark Cuban thinks makes this bubble worse is that these types of investments have virtually no liquidity. There is simply nowhere to sell your shares of the latest, hot, disruptive, fast-rising company. As such, your investment is locked in, and if this bubble pops. Those investments are going to zero with no way out.
On the other hand, that means, unlike the previous bubble, the damage won’t be as widely spread. These companies in the tech bubble aren’t in anyone’s 401k account, or Roth IRA retirement plans. While there are some smaller investors who have taken advantage of new SEC rules to allow crowdfunding, this is still a far cry from 1999 when nearly everyone’s 401k had a tech fund or stock in it just waiting to blow up.
When this tech bubble pops, it won’t be pleasant, but chances are at least it won’t take everyone else’s investment accounts down with it.