For the past few months, there has been a debate about whether the tech bubble is about to burst. There are two men that are making strong claims on each side, but we are going to take a deeper look into the situation ourselves as well.
Mark Cuban, the “Shark” investor on the show Shark Tank and owner of the Dallas Mavericks earned his money during the 2000 tech bubble. His prescience identified the bubble and he sold his company, Broadcast.com for $6 billion to Yahoo. Now, Cuban is claiming it is happening again.
“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. 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?”
However, Mark Andreessen, co-founder of Netscape, which sold to AOL for more than $4 billion before the tech bubble popped, disagrees. Andreesen even has a 53-page PowerPoint presentation to tell you why the current situation is very different. So whom should we believe? Lets take a look at what is actually happening in Silicon Valley and what the data shows.
Well, venture capitalists are pouring money into “top performing” startups like Uber (received $8.2 billion) and Snapchat (received $1.2 billion). Over the past year, total capital investments are up by 38%, but the total number of deals is down by 40% – interesting. It looks like venture capitalists are having their cake and eating it too. These venture capitalists are investing say, $100 million in a later stage startup that is valued at $1 billion and receive protections. So, unless the valuation of the company decreases by 80% or more, then they will still get their money back. They can most likely walk away with at least their original investment, but reap huge rewards before that happens.
This data would make it seem like venture capitalists believe that the tech bubble is stretched thin. Fear is starting to take over instead of greed. As we reflect back on our first investment lesson of, “Buy low, sell high” we need to apply it to the current situation and it seems that right now, it is hard to buy low – that is what is important.