VC BUBBLE ACCORDING TO MARK CUBAN

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By Scott AustinCall Mark Cuban what you like — Maverick of the NBA, a billion-dollar lottery winner, a reality TV shark, a prolific blogger — but he still views himself first and foremost as an entrepreneur.

Mark Cuban, in The Wall Street Journal’s offices talking shopThe billionaire first earned his riches from starting up MicroSolutions and selling it to CompuServe for $6 million in 1990, then more bountifully after co-founding Broadcast.com and convincing Yahoo to pay more than $5 billion for the company at the height of the dot-com bubble. 

So as the valuations of Web companies like Facebook, Groupon, Twitter and Zynga skyrocket on the private markets, does Cuban think another bubble is brewing?

He’s calling this one a “technology VC bubble,” where new venture-capital money is paying off old money almost akin to, in his own words, “a Ponzi scheme” or “an old chain letter.”

In a video interview Friday with WSJ’s Alan Murray, Cuban said:

Rather than individuals benefitting or getting hurt, VCs are playing their own game of ‘bubble yes’ or ‘bubble no.’ What’s happening now is that if you’re an original investor in Twitter (as an example), that was great because the next VC who came in paid a higher valuation, gave some money to the company, but gave most of it to the first investors or to management….Then the next level that came in, they gave it to the previous.  It’s more like a Ponzi scheme. It’s almost like an old chain letter.

Cuban’s not known for mincing words, but associating one of the most fraudulent investor schemes known to man with these venture-capital investments is a tad harsh considering Twitter, Facebook, Groupon and Zynga — the big four Web companies that have each raised hundreds of millions of venture capital, much of it going to early investors — have a real chance of staging IPOs and becoming successful publicly traded companies. (At least Cuban, who invests in start-ups himself, didn’t say venture capital is worse than a Ponzi scheme, as Fortune columnist Stanley Bing once did.)

But Cuban does make a valid point, that while these massive liquidity rounds are suspect, this potential bubble-trouble has yet to spill onto the public markets.

You can watch the 21-minute interview below or at this link (bubble talk starts at 14:19) in which Cuban uncharacteristically clamps up on the subject of basketball, but also discusses why investing diversification is for idiots, why patent trolls are the bane of tech companies and why he’s not running for president.