Mark Cuban on what has gone wrong

When private companies can’t or won’t go public, they become easy pickings for their competitors to buy them…In my not so humble opinion, this is the ultimate productivity and investment killer in the USA today.

And this:

One of the reasons today’s 3700 public companies hoard cash is because they know that rather than investing in uncertain R&D and productivity enhancements to protect them against the “Innovators Dilemma”, upstart companies that could disrupt them and their industries, they can simply buy those companies.


It is undeniably destructive to our economy and future when many of our most innovative and exciting companies are bought by their competition.  It is a “Precognitive Anti-Trust Violation” I know that sounds laughable in so many ways. But at its heart, it’s true. It’s also incredibly destructive to our standing in the world and our economy.

Speculative, but worth a ponder.  The full post is here, and for the pointer I thank Michael Milburn.


Seems worthless without data. I could easily say that, IF companies are indeed selling more than going public (relative vs. history), it frees up founders/CEO's of the targets to go on and continue innovating with new ideas. Boom. Net positive to the economy/consumers/world.

Furthermore, in the tech sector lots of innovations aren't really viable standalone businesses. They need to be integrated into something bigger to create real value, and selling out is the quickest way to do this. Of course, a lot of mergers fail but I doubt investors would back the innovators in the first place unless they thought acquisition was likely.

Wisdom from a man who's sole achievement was being lucky enough to sell a technologically-untenable doomed-to-fail money-pit at the height of the biggest bubble of the past 100 years. Oh, and let's not forget that he thinks that 9/11 was an inside job...

I don't begrudge Mark Cuban his giant fortune, I'm just flabbergasted that he's heralded as a business guru on par with Buffet, Jobs or Branson. Frankly I don't think really see how his opinions should carry any more weight than a powerball winner.

"Oh, and let’s not forget that he thinks that 9/11 was an inside job..." And? What happened later (Iraq etc) wouldnt make you think that it would be impossible... Also there are numerous things with the official version which are a bit strange/dubiuous anyway.

That the government is hiding some things about 911 does not surprise me. Nor does it mean they are hiding what you think they are.

Occam might say;
The government is lying and/or withholding significant information.
It is more likely they would lie to cover incompetence than to cover up a skillfully crafted, complicated plot wherein they achieve their policy goal through planning, cunning, and sustained effort.

How would what happened later in any way suggest that it was an inside job? Thousands of people died and billions of dollars were lost trying to dismantle the terrorist networks that funded the attack?

Well ok, never forget that some people earned a lot of money from that, so those billions were not entirely lost. But you really have to wonder, if a government launches a war based on totally false pretexts that probably ended up killing even more americans than 911 itself... well, maybe that government is not a government you can trust, and these conspiracies theorists have a point there.

Moreno, we offer discounts if you room with the Yeti bro. Please enjoyour cruise .

Heh, I LOL'ed. Just like they wanted me to do.

My understanding is he sold for 100% stock, borrowed against it during the lock-up period, and used those to short an index of tech stocks. He still has his riches because of good fortune and impressive foresight.

Public companies are easier to buy out. If a public company receives a tender offer well above the trading price, they will probably take it. A private company can just say no. Look at plentyoffish for instance.

Wait. He's telling us that, instead of doing their own R&D, they buy some from someone with a competitive advantage in R&D? Oh, the horror! How will capitalism ever survive?

And all this R&D just happens to lead to products and services for which there is no close substitute? Boy, the companies that buy these startups must then be able to charge outrageous monopoly rents, leading to rapid increases in the relative prices of technology-based products. Or they can bury those innovations so the pace of advance in technology-intensive sectors is much slower than in others.

"One of the reasons today’s 3700 public companies hoard cash is because they know that rather than investing in uncertain R&D and productivity enhancements to protect them against the “Innovators Dilemma”, upstart companies that could disrupt them and their industries, they can simply buy those companies."

Spot on. And I don't thing it's totally a bad thing.

well it is a bad thing if you're a billionaire investor with 50+ portfolio companies that need to IPO so you can cash out.

Why? If the public company buys your portfolio company, you're cashed out.

Longer time line? That makes sense and jives with the whole "Dead Money" idea. VCs can only handle a strict number of companies, too. If waiting for a buy out takes 6-12 months longer than taking a company to IPO, that's a significant reduction in turnover for a VC.

Companies that are sold are, on average, much smaller than those that IPO. You have the timeline backwards.

Another reading of the situation would be that they're buying up patents and that purchasing companies is just a means to that end. Extremely well renumerated people often have a knack for awarding themselves moral worth to match their financial gains. I think this entrepreneur is over estimating the value of he and his ilk.

Maybe it's just a sensible division of labour. Start-ups good at early stage innovation. Once proven, bigger companies are better at developing and marketing. Going public is a red herring - private companies aren't 'easy pickings'. They have to be willing to sell up. The owners must be convinced that the price they're being offered is more than the NPV they could generate independently. I suspect they're right. And the corporate cashpiles can be explained by tax codes. Doesn't make sense for them to be saving up to acquire private companies, because cash has been building up more rapidly than start-ups have been acquired. I just don't see the problem here. To the extent the process he describes is real, it looks like a good thing - efficient division of labour ensuring that innovation is happening in small firms with fewer bureaucratic constraints, and then being adopted and disseminated by larger firms better suited to those tasks.

+1. And those private companies aren't 'easy pickings' only because the owner retain the option of operating independently but also because there may be a bidding war between potential buyers (as, for example, in the cases of Instagram and WhatsApp).

Yes, it seems like unless public companies trade at much higher valuations (arguably private companies have closed the liquidity premium gap recently), they are much easier to take over. Management has legal obligations to consider an offer in public companies. A closely held private company can just give suitors the finger.

Even as someone who finds Cuban's borderline unhinged thing entertaining, I wish he'd think through his opinions before stating them as facts.

"Maybe it’s just a sensible division of labour. Start-ups good at early stage innovation. Once proven, bigger companies are better at developing and marketing."

The biotech-ization of consumer tech.

Start-ups good at early stage innovation. Once proven, bigger companies are better at developing and marketing.

Indeed .. this is what's happening. And one consequence is that the duration of engineering careers is shrinking. The startups aren't hiring 50somethings or 40somethings.

There is still a LOT of engineering to be done, post-acquisition, on products that are past the start-up phase. And not a lot of 40 and 50 somethings with families and lives really want to live the 80-hour-week, boom-or-bust startup life (especially given the prospect of ending up with a lot of worthless stock options after the VCs throw in the towel -- which is what happens to most startups).

I always wonder why employers that issued options don't issue put options, which could be valuable under many circumstances. I guess I've never worked for any, we always just had restricted stock.

Maybe the reason that fewer companies go public is that the public of stock picking individual investors has shrunk. It used to be that stock picking was a fun pastime, but the relentless mantra of "you can't beat the market" has driven all the buyers of those small, speculative companies out of the market.

According to the Fed, just 14% of individuals own stocks. That's down from 21% in 2001. I bet it's down quite a bit from earlier, but I couldn't find stats. My grandmother and her sisters all owned stocks, watched Louis Rukeyser and managed their own money. Those days are long past, in part because ninnies like Felix Salmon and Jason Zweig drill it into people's heads that they're idiots to own stocks.

Ah...Louis Rukeyser. The nostalgia for that man and his show remains strong in me. Thanks for the memory.

Does that include mutual funds? If so what is the connection with the ninnies?

Isn't investment diversification common sense these days?

In 1952, 90% of stock was owned by individuals. Today that number is 27%. So there has been massive decline in individual ownership.

If a mutual fund owns a share, and I own a mutual fund, does that count as individual ownership? If not then a large part of the decline is simply a nominal, not real one.

58% owned by individuals, mutual funds and ETFs (i.e. individuals), 16% by pension funds (private and government), 14% owned by foreigners , 11% hedge funds and other.

If a foolish consistency is the hobgoblin of little minds, then Cuban has a large one. Mind, that is. Why would a private company be more vulnerable to a takeover than a public company? Why would a public company need to hoard cash if it isn't at risk of a takeover? I do agree with Cuban that the decline in the number of public companies, and the almost elimination of IPOs, is a bad sign for American business. It's a bad sign for many reasons, including that companies aren't raising cash in the public market in order to invest in productive capital, that old companies are buying up new companies and their technology to eliminate competition, that wealth is so concentrated in so few that the public market can't compete with the private market, that owners of capital prefer to sell companies to each other than invest in productive capital (technology).

I think a big part of the Cuban's message is that many startups no longer even have the plan of becoming a lasting company and making it to IPO. The startups are designed to be sold, not to become lasting competitors. I think this mindset is part of Cuban's point, and he thinks the economy is losing out due to this.

Finally, someone get it.

Reproducing the infrastructure for manufacturing, marketing, customer service and finance in the form of a new corporation for every new idea that comes to market is not necessary.

Wow. What an amazing idea. Never thought of it that way.

If you read Cuban's entire article, it is about income inequality. He points out that the days of all the employees getting rich are gone (the proverbial millionaire janitor) because now it all accrues at the top. He admits that this is more of a cultural change than a government-imposed one. The article is more of an observation than a philosophy.

I am not sure this is all about income inequality and not an Angel Investor complaining about his charges....

If true, there are tax implications.

Cuban's claim doesn't make sense unless he is really talking excessive IP rights. Otherwise, adding a defensive premium to a disruptive business model only incentivizes future entrants. The hypothesis is missing something between the defensive purchase, and the reduction in productivity.

This response nails it.

I read this earlier. I would rate it as better than speculative. I think it is what Mark sees at the circus. By that I mean it must be real, but perhaps only a fraction of the whole story.

The unicorn cycle has been strange and unusual.

Cuban ends with "If you have gotten this far into my long-winded diatribe, thank you. Let me be clear, I’m not religious about any of this. I believe it. I’m investing in trying to fix it. But like everything else, I am putting it out in public in order to “check my hole card” and get feedback from everyone so I can get a little bit smarter about the whole thing." Gotta love a man like that. (Hey, how about roping him into a Conversations with Tyler?) That said, not buying his argument that compared to publicly held stock, privately held stock is "dead." The flip side of the story is: "Despite selling at substantial discounts, private placements of equity are associated with positive abnormal returns. We find evidence that discounts reflect information costs borne by private investors and abnormal returns reflect favorable information about firm value. Results are consistent with the role of private placements as a solution to the Myers and Majluf underinvestment problem and with the use of private placements to signal undervaluation. We also find some evidence of anticipated monitoring benefits from private sales of equity. For the smaller firms that comprise our sample, information effects appear to be relatively more important than ownership effects."

A large company can buy up small competitors for lots of reasons.

In the large company I work with, the most common reason for buying another company is to fill a gap in our own portfolio. Say we make industrial software, but we're really missing a good package for fault analysis. Our customers don't want to buy our suite of tools if we don't have an integrated fault analysis package.

We could write one, and delay our entry into the market by a year or two and incur all the costs and risks of a new engineering project. Also, our engineers aren't expert in that type of software and don't know the market very well, so discovering all the requirements, understanding user needs and the like is going to be hard for us.

Or, we could find the best one in the market and buy it, and then just do the work to integrate it with our suite (interfaces, branding, etc). So we buy the company, and now our product line is complete.

So how does this hurt innovation? Simple. The small company we bought may have been filled with engineers expert in that one field. It may have been a bunch of line engineers who work in fault analysis and built an incredible package based on their local knowledge of the industry. They may have had all kinds of ideas for where to take the software and what they might do with it in the future. They were closely aligned with the industry they served, and fine tuned to deliver the best fault analysis package available.

Smaller, independent firms are where a lot of our innovation comes from. But then they get bought by MegaCorp, and often the team gets broken up. Some engineers don't want to work for MegaCorp and take a severance package and leave. Others come over with the software, but now find that those cool ideas they had for version 2 have to be approved through the management chain, and there are 'other priorities'. Or, people who don't know half as much about that specific niche as they do but outrank them in the engineering group have to have 'input' into the design, and you start having review meetings, change by committee, extra layers of people that requirements have to pass through (and who change them), etc.

Suddenly, that innovative new package that was purchased is just another cog in the wheel, all the excitement and enthusiam of the original small team is gone, and when V2 comes out it's been stripped of everything that made the first version special. All those cool ideas never see the light of day.

That's probably the best case scenario for when small tech companies are bought by large ones. The worst-case is that the company was bought for its patent portfolio, and no one is much interested in continuing the development of their actual products. The engineers get distributed to other teams or layed off, and that little pocket of innovation dies.

Dan, thanks for the insight on this. good post.

I'm not sure what "competitor" means in Cuban's usage. He seems to be thinking of something much broader than typical antitrust notions of competition.

In the medical device industry, for example, a very typical model is for a physician or researcher to have an idea, start a company, grow it until the product looks viable and cash out by selling to a larger company that can market it more broadly. The larger company wants to buy because the technology is not something it has in its portfolio - i.e., it's not a competitor. The inventors cash out (and not infrequent go look for another), the big company gets a new technology (that's now part of a public company, btw), and consumers win from broader access to it. Is that really so different from an IPO?

If there is competition between them, there's nothing "pre-cognitive" about it and that's where enforcement is supposed to happen, and sometimes does.

The key point is about enabling long-term independence, with which I agree. Would Apple and Microsoft have been as innovative in the safe arms of IBM? etc.

"When private companies can’t or won’t go public, they become easy pickings for their competitors to buy them…In my not so humble opinion, this is the ultimate productivity and investment killer in the USA today."

In my experience working as counsel for medium sized businesses, one of the most common business models, the plurality really, is to try to get big businesses in the industry to buy them and this is what drives their efforts to increase productivity and invest and innovate.

I can think of at least a dozen innovative businesses whose managements I have known personally with this business model and I can't think of even one that saw going public as their preferred option. Moreover, the businesses most in a position to have a national reach and large scale as large privately held firms have generally been the most interested in being bought out, although I do have a couple of medium to large sized firm clients that are interested mostly in slow measured growth as opportunities present themselves, rather than rapid expansion, which have no interest in either being purchased or going public.

The transaction cost and tax costs of going public and continuing to manage a firm are not favorable relative to continuing to operate a firm as a privately held company and going public also doesn't allow for a 100% cash out transaction because retaining some ownership is necessary to retain credibility with investors and maintain control. A buy out by another firm is the only way that an innovator can both cash out his investment in the business 100% and be relieved from managing it once it has been established by competent management so that a new business (often completely different from the old one) can be begun.

From the acquirers perspective, the goal is often rapid growth at a rate that can't easily be achieved organically.

Going and being public has become something of a chore, hasn't it? I assume this mainly incentivizes Silicon Valley-style innovators who "build to flip" in the conventional 5 years or so. Most of those seem to end up in VC afterwards rather than starting a new business.

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