Most people probably think of the financial collapse of 2008 when they think of systemic risk. After all, those events led to Ben Bernanke describing some banking institutions as “too big to fail,” since they posed major risks to the health of financial markets. However, we must be careful not to associate the term “too big to fail” only with banks. Systemic risk as described by Duke Professor Steven Schwarcz is “the risk that an economic shock such as market or institutional failure triggers (through a panic or otherwise) either the failure of a chain of markets or institutions or a chain of significant losses to financial institutions, resulting in increases in the cost of capital or decreases in its availability, often evidenced by substantial financial-market price volatility.” In other words, a trigger event which causes the potential for a series of bad economic consequences. When looking through the framework outlined by Schwarcz, it becomes apparent that there are other non-bank companies with the potential to cause systemic risk, and given its immense size, a company like Uber is probably one of them.
Founded in 2009, Uber has quickly grown to a $68B private market behemoth providing numerous services, and in many ways representing the general health of venture capital markets. In fact, their presence has become so enduring that it is now common to hear the phrase “we are the Uber of.” Uber has become such an essential part of today’s economy that it is hard to imagine a world without it. The company relies heavily on private market funding, having raised as much as $15 billion from outside investors. Which is why the consideration of potential systemic risk comes into play, especially given the recent news at Uber. In the last few months there has been a crippling lawsuit from Google, a Justice Department investigation into Uber’s Greyball software, wavering consumer sentiment and rumors of substantial cash burn. Combine these factors with the illiquidity of private markets, and there is clearly the potential for a disruptive event. The longer Uber stays private and relies on privately raised capital, the greater the risk of disruption if that funding were to dry up for any reason.
At current count there are 193 private companies worth more than $1 billion with a total aggregate value of $681 billion. Uber is 10% of that aggregate value. Clearly it is worth contemplating the question of potential systemic risk, especially the notion of “increases in the cost of capital or decreases in its availability,” as Schwarcz so aptly defined it. If companies like Uber were to have difficulty raising capital in the future, it obviously won’t cause the disruption on the scale that the global economy experienced by the failure of Bear Stearns and Lehman in 2008. (The troubles at Theranos provide a useful data point here in that a $9 billion company evaporated without much effect at all on the financial markets.) But clearly funding trouble at the largest startups would have a cooling effect on the growth trajectory of the many exciting private businesses that are currently relying on that same pool of capital and that is more than troublesome.