Sunday, March 08, 2015
Is There A Tech Bubble?
Mark Cuban has created an uproar by suggesting that we are in the middle of a Tech bubble, much bigger than one seen in 2000, and it may all end badly soon. Mr Cuban, who made his billions on the back of the bubbles, is someone to be listened to - and he is surely sounding apocalyptic. It is therefore worth looking at his argument closely and putting it in context.
The apocalyptic part of this warning is based on common sense. He is pointing out that todays billion dollar valuations are driven primarily by private capital, private equity and all that, as opposed to the IPO-led bubble that we had last time around. And, indeed, in a privately funded bubble, if and when it bursts, there will be no exits for too many people. In this setting, it will not be about doing a fire sale, it will be about just closing doors and going home.
This part of his argument makes sense. If the bubble pops, there is a real possibility of a quicker and nastier fall-out than what we saw in 2000. However, the central question is whether there is indeed a bubble. While Steve Case and others contested this almost immediately, it may still be worth reflecting upon.
If a bubble has to be defined in terms of symptoms - uneducated investors, outsized valuations not backed by fundamentals and fever pitch in the media - they are all present. Indeed, private valuations, backed by willing banks and loose money, are more prone to excesses than public markets. Privately funded bubbles can last longer, because everyones incentives may be aligned, but unexpected external events, say a slowdown in China and end of easy money, can start a stampede.
However, over and above just the symptoms, there is another fundamental weakness of the current tech investment philosophy. The defining characteristic of tech investment this time around is the philosophy of Software eating the World, in Marc Andresens now-classic words. More appropriately, this is about technology breaking into areas dominated by the most powerful institution ever invented - the State! The new wave of investments are going into tech companies working in Education, Transportation, Energy and Healthcare, with its primary value proposition centred around circumventing and disrupting the State as it exists today.
This is the key assumption that the success or failure of the technology investments hinge on this. If the current regulatory environment continues to exist, the tech bubble will surely burst. The business models of the sharing economy is plainly illegal, and global universities and transportation companies are operating within grey areas. This may indeed seem logical sitting in some parts of California, New York or London, but from other vantage point, it does seem the state is pushing back. Indeed, if a History of regulations was written, one would notice that the State always pushes back after a period of relative deregulation (not least because businesses keep pushing the boundaries and ultimately overdo it). This may indeed be one such moment, where the uncertainties and dangers of the globalised world - think Putin, ISIS, Cowboy bankers and all that - are generating consensus about strong interventionist states and fortified boundaries, not deregulation, flexibility and openness. The history-blind investors are betting on a globalisation apocalypse, though they continue to watch regulatory overreach in United States, their own backyard, and only blame Obama personally for the same.
Given that this, flawed, assumption underpins huge valuation, high and growing, there could indeed be the making of a bubble. The problem indeed is the rather insular structure of the investment community, which, given the concentration of wealth and private nature of investments, the herd mentality, which makes a bubble, is so easy to spot. With all this, Mr Cuban should be listened to, not dismissed out of hand being one of those bubble profiteers who may be merely advancing his own cause.
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How To Live
"Far better it is to dare mighty things, to win glorious triumphs even though checkered by failure, than to rank with those poor spirits who neither enjoy nor suffer much because they live in the grey twilight that knows neither victory nor defeat."
- Theodore Roosevelt
- Theodore Roosevelt
We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time.
- T S Eliot
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