ICYMI: DOJ Workshop Highlights The Importance Of Big Tech’s Investments
Last week, the Department of Justice and Stanford University held a public workshop to examine the intersection of venture capital and antitrust law. As panels of investors and legal experts discussed the issue, one common notion stuck out: investment funding behind tech startups is healthy and growing. This strength of venture capital is opening the door to new and innovative competition in the tech sector. Over the course of the full-day workshop, panelists hit two main points:
— Evidence indicates acquisitions are often pro-competitive and pro-innovation
— Unwarranted regulatory intervention could distort the functioning of competitive, pro-consumer markets
Evidence indicates acquisitions are often pro-competitive and pro-innovation.
Ram Shiram, Founder and Managing Partner of Sherpalo Ventures, pointed out that venture capital funding is reaching record highs, indicating that investors see growth potential in new, innovative competitors. “Venture firms had $403bn in total assets in 2018. Compare that with 2004, where it was $158bn. So from 2004 to 2018, it went from 158 to 403. Also, the yearly VC investments hit a new record in 2018: more than a thousand firms deployed $70b of capital in 8,000 companies in 2018. And there were 52 first-time new funds in 2018, which is a 15-year high. So I think the vibrancy and the health of the VC business is better than it’s ever been before, and that’s because there’s lots of companies buying.”
General Partner of Trinity Ventures, Patricia Nakache, makes the case that acquisitions as an exit strategy give entrepreneurs the freedom and flexibility to launch their own startups. “The whole reason entrepreneurs take on this incredible risk is because there is enormous upside when a company does have potential to become standalone, or Plan B – get bought. So I am very nervous when we talk about potentially putting friction into what is a very important liquidity outlet for entrepreneurs and for investors, by the way.”
Much of the innovation in Silicon Valley is due to “acqui-hires” and the free movement of labor, per Ted Ullyot, Adjunct Professor at Antonin Scalia Law School, George Mason University. “As we’ve all seen time and time again, the tendency is that as companies become too big, [employees say], I’m sick of the bureaucracy, I want to go create my own startup. And so people get in and get launched that way. People come to the Valley to work in this relatively secure environment with a big company and then roll out and do their own thing.”
For example, YouTube may have been saved from “annihilation” through its acquisition by Google, according to Sequoia Capital partner Michael Moritz. “When Google, for example, in 2006 bought YouTube, they saved YouTube. The killing fields at YouTube, it certainly wasn’t Google. The killing fields were called Universal, Warner, Sony with their battalions and phalanxes of lawyers, their ferocious attack dog agents, who were making these extraordinary threats of annihilation to this little company that for the first 8 or 9 months of their existence worked out of our office.”
Unwarranted regulatory intervention could distort the functioning of competitive, pro-consumer markets.
Uncertainty surrounding antitrust enforcement could lead to perverse incentives amongst market participants, according to Stanford Law School Professor Doug Melamed. “I do think that at least a widespread program of taking retrospective looks at past mergers not only would raise very difficult remedy questions — so-called ‘unscrambling the eggs’ — but also would raise some difficult incentive questions. Do you want to create incentives for acquiring companies to keep the acquired firm on a leash so it doesn’t get so big that the agencies can come back and think ‘oh my god, we should never have let it happen,’ or do you want to create incentives for acquiring companies to scramble the eggs inefficiently to make remedies less desirable?”
Erik Hovenkamp, Assistant Professor of Law at USC’s Gould School of Law, clarifies that the idea of a “kill-zone” is not necessarily an issue within the antitrust realm. “[T]he relevance of this kill-zone idea to antitrust is not totally clear. We have to be a little more specific to get into antitrust relevant territory. We have to ask: ‘Why are startups not entering this area? If it’s not related to some kind of behavior or some kind of fishy agreements between firms, then it’s not really in conventional antitrust territory. So for example, if it just seems too hard to compete with this dominant platform because its product is so much better or because its network effects are very strong, we can’t really pin that on a conventional antitrust violation.”
The fast-moving nature of innovative tech markets could make it difficult for regulation to keep up without distorting the organic disruptive innovation process, argued Ram Shiram. “The way to think about it is ‘how do you level the playing field without trying to pick winners and losers?’ Because in fast-moving tech markets, you don’t want to — because the regulation becomes obsolete or becomes itself a disruption to the smooth functioning of marketplaces. So you want to be very thoughtful about how you think about it. And again remember, the ‘buy-and-kill’ approach really is not what happens within big tech today as best as I can understand, across different companies. Even — if you take Facebook’s acquisition of Instagram — it was not a ‘buy-and-kill’ strategy, it was a buy and coopt and probably grow that into a new opportunity for them.”
Ben Thompson, Founder of Stratechery, brings the antitrust conversation back to its foundation–the consumer welfare standard. “The scale happens because consumers find benefits in these platforms, they all have network effects where the more people that are on there, the better they are and more useful. And then the flipside of that is the speed with which benefit can be dispersed is just astronomically fast. And so any time you’re bringing in consumer welfare in any of these questions, it gets really tricky to say that there’s a big problem here.”