Over a giddy four-year period, from 1997 through 2000, investors in the United States who purchased stocks in Internet-related businesses saw rapid and profound growth in the value of their portfolios. There was tremendous enthusiasm for companies poised to take advantage of the new communication and marketing network, and dot-com fever swept the land.
Things came to a crashing halt almost exactly 15 years ago, when the NASDAQ index peaked at 5,132 and then rapidly declined. The dot-com bubble burst, taking numerous companies and large amounts of capital with it.
Now one of the leading beneficiaries of that bubble, billionaire entrepreneur Mark Cuban -- who sold the now-defunct Broadcast.com to Yahoo in 1999 for $5.7 billion -- is warning that we are in the midst of a much larger and even more dangerous tech bubble.
Liquidity and Angels
Writing on his Weblog "Blog Maverick," Cuban argues that all bubbles have a similar characteristic: optimism.
"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," Cuban said. "In the tech bubble it was Broadcast.com, AOL, Netscape, etc. Today it's Uber, Twitter, Facebook, etc."
But, Cuban goes on, there is a big difference between the tech bubble at the turn of the century and the one he sees today: liquidity.
"Back then," he argues, "the companies the general public was investing in were public companies. They may have been horrible companies, but being public meant that investors had liquidity to sell their stocks. The bubble today comes from private investors who are investing in apps and small tech companies."
According to Cuban, since small tech startups and app builders are not publicly traded, these businesses are seeking financial support from the nation's approximately 225,000 "angel" investors and a growing number of less wealthy equity crowd-funders, who can participate for as little as $5,000.
The peril, Cuban says, lies in the fact that the angels and equity crowd-funders have nowhere to go if things go badly. "The only thing worse than a market with collapsing valuations," Cuban wrote, "is a market with no valuations and no liquidity. 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?"
Shark Tank Philosophy
As someone who cashed in his chips well before the collapse of the first tech bubble, Cuban is certainly entitled to offer his views on the current financial structure of the tech industry. However, as one commenter on his blog pointed out, Cuban's gig on the television show "Shark Tank" certainly contributes to today's frenzied entrepreneurial environment.
"Meanwhile," Signifyin wrote, "…Mark continues to work on Shark Tank [while] openly criticizing the number of Angels in the market."
Another commenter pointed out that it is unclear in the end whether Cuban is genuinely concern about the potential collapse of a second tech bubble, or is in reality arguing that the SEC should make it easier for today's startups to raise money in the equity markets.