Mark Cuban made his fortune as an entrepreneur and tech investor, recently making many smaller investments in companies he judges on Shark Tank. In a NextMarket podcast, founder Michael Wolf asked if crowdfunding platforms like Kickstarter might become a “disruptive replacement” for angel investors like Cuban. Cuban’s actually a fan of the platform, telling Wolf:
“Kickstarter should be a requirement for every startup. It’s a way for you create demand and sell the product without giving up any equity. That is a compliment to what an investor might do. In terms of PE, there are strategic investors and then there’s just money. I’m not a big fan of money investors, which is what most angel investors turn out to be, because they just want their money back.”
His argument is that those money investors create an atmosphere where it’s all about the exit rather than creating cash flow. Kickstarter is something an antidote because it helps entrepreneurs to actually focus on their product, market it, and generate some money. Cuban said he rarely invests in a company unless he can add something.
“Money investors” have helped drive some companies away from the things Kickstarter requires, like confirming demand and generating cash flow.
According to Cuban, a sort of feedback loop between that kind of investment, and startups looking for it, has helped create a bubble. “There’s something going on right now that is really scary.” Cuban said. “You saw it first in Silicon Valley. There is a huge bubble in valuations. That bubble has created an environment where companies are looking for funding and have no plans on creating a cash flow based business and returning cash to investors, and it’s all about exit strategies…”
He describes the problem as “worse than the tech bubble in the stock market” because of the lack of transparency and liquidity.
Cuban timed his sale of his stake in Yahoo! perfectly before the first tech bubble burst in the 90’s. Prospective entrepreneurs might want to take his advice and build a base on something like Kickstarter before searching for angel investors, and be sceptical of some of the high valuations they’re seeing.
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