One instructive example is Theranos, the company known for its needle-free blood-testing technology. A few short years ago, it was roundly considered a Silicon Valley success story, valued at some $9 billion. Then, The Wall Street Journal revealed in a deeply investigated series of stories that the technology didn’t actually work as claimed—information that led to federal sanctions, lab closures, and ultimately Theranos’s announcement that it would leave the medical-testing business altogether. Theranos failed spectacularly, but it didn’t pop the bubble. So perhaps that’s a sign that the bubble isn’t going to pop all at once the way it did last time. The key is whether investors see a significant failure—like Theranos, and maybe Uber—as a one-off, or as a reflection of a systematic problem bubbling under the surface.
“One hypothesis could be that if a large pre-IPO tech company fails, then the source of capital for the others will start to shrink,” said Arun Sundararajan, a professor at New York University’s Stern School of Business. “That’s part of, I am sure, what happened during the dot-com bubble. But we are in a very different investment environment now.”
There are two big changes to consider. For one, practically every company is now a technology company. Silicon Valley used to make technology that mainstream consumers didn’t care about—or didn’t know that they even used. Not so, today. Technology is pervasive throughout the economy and throughout culture, which creates a potential protective effect for investors. “The investments into these companies are creating new business models in massive swaths of the economy, as opposed to being insulated,” Sundararajan said. “Also, a bulk of the money going into these companies is coming from players who are not dependent on the success of tech alone for their future financing.”
This is the second change to consider: Whereas tech investments were once made by a relatively small group of venture capitalists who funded companies that then went public, that’s no longer the case. “Even if you put Uber aside and look at some of the larger recipients of pre-IPO investment over the last few years—it’s a very different cast of characters,” Sundararajan told me. “There are large private equity firms that are much more diversified than, say, Kleiner Perkins was 20 years ago.”
Sundararajan’s referring to Kleiner Perkins Caufield & Byers, the venture capital firm that “all but minted money” in the 1990s, as the writer Randall Smith put it. Back in the day, the company made its investors enormous sums of money with early investments in Google and Amazon, but has stumbled in recent years.
All of this means that the investment infrastructure supporting technology companies has changed, and that’s largely because of how technology’s place in culture has changed. “If Uber fails—and there’s no guarantee that it will—all of Uber’s investors won’t say, ‘Were we wrong to invest in tech?’” Sundararajan said. “They will say, ‘Did we misread the capabilities of this one company?’”