Why This Tech Bubble Is Worse Than 2000

It isn't. In fact, it's almost certainly better.

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.

No, it's not ironic, it's hypocritical at worst, and a coincidence at best.

Yeah. He shouldn't have done that if he wanted to be taken seriously.

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.

>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."

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.

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're misreading him. Those are examples of "an existing success story" that other startups are comparing themselves to.

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.

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).

Yeah, how does Uber not have real value?