>The bubble today comes from private investors who are investing in apps and small tech companies. ... >Why ? Because there is ZERO liquidity for any of those investments. None. Zero. Zip.
Is he wrong?
There wasn't previously a very good market for small and medium size investors to get near investing into early stage tech companies nationally. It has been a locked-away market. I know lots of people with single digit million dollar net-worths, none of them have a clue how to get close to interesting tech start-ups for investing purposes.
How does a person from Nebraska, worth $5 million, invest into interesting tech start-ups in Seattle? Until now, that has been extraordinarily difficult, if not impossible.
So now that there is a market for doing just that, why wouldn't prices rise on those investments? It makes perfect sense that they would, and should. Those valuations have been artificially repressed by government regulation.
What Cuban is claiming is a bubble, is more likely in fact a market being unleashed where it was previously forbidden to exist by regulation.
We're a long ways from the next Dr. Koop billion dollar valuation, with a $50+ million round of financing, coming out of crowd equity funding sites.
Furthermore, the bubble dynamic usually requires liquidity. The bubble dynamic happens when prices are going up so much that participants do not care about an underlying valuation but are certain they will be able to sell in the near future for a higher price due to the market momentum. This whole way of thinking, requires liquidity.
If there is indeed a bubble, I do not see how it can logically be caused by lack of liquidity.
Simply put:
1) valuation = price of last share sold * number of shares
2) value = price at least one buyer is prepared to pay for the entire company
Lack of liquidity in private companies generally comes from the fact that you can't buy or sell shares without agreement from the board. So "price of last share sold" is quite simply directly set by the board, people who have a vested interest in this number being as high as possible.
It is normal for valuation to be larger than value (for public companies), but not by much. You could actually buy (very nearly) all of Microsoft for 360 billion dollars (it's market cap). A bubble can probably be best defined as valuation >> value.
Because these are private investments without liquidity, that has prevented a bubble. You don't have people investing just to ride a rising wave and make profits from day trading. Investors this time have to actually look at the chances of the companies themselves, because they're only going to get a payday if the company is wildly successful, and nothing otherwise. If things start to slowdown, there probably won't be a sudden crash, because there's nothing to crash. These companies have ambiguous valuations, and there's no way to cash out, so there can't be a race to be the first to sell.