Setting The Record Straight: Debunking The Myth Of The “Kill Zone”
Anti-tech crusaders too often cry “kill zone” — despite clear evidence that today’s tech climate encourages startup activity, rather than stifling it. The myth of the “kill zone” alleges that due to an overly concentrated tech market, venture capital funding is stifled for startups and small businesses. The theory holds that leading tech services often replicate the products of their smaller competitors in an effort to shut them out from their respective industries. The reality is that the global venture-investing market is at record levels: U.S. companies attracted more than $130 billion in financing in 2018 — the highest sum in a decade. The facts are clear: it has never been easier for new firms to autonomously enter and compete. Check out the research below:
—For startups entering new arenas, “kill zones” are not a concern — and acquisition is often a goal.
—Arguments that leading tech services create “kill zones” through data accumulation are unfounded.
—The current venture capital investment climate is thriving, encouraging innovation among startups and ultimately benefiting consumers.
For startups entering new arenas, “kill zones” are not a concern — and acquisition is often a goal.
As noted by Jim Pethokoukis of the American Enterprise Institute, future acquisition is often a goal for founders, as it allows them to continue expanding on other growth opportunities. “For founders, future acquisition is often “the goal. Then the entrepreneur can go on to start another firm or become an investor in other aspirational startups working on risky new ideas. Same goes for the investors in the acquired firm. What’s more, these purchases are often “acquisition–by–hire” situations where the prize is talent rather than the Next Big Thing. And when an upstart firm has a valuable idea, acquisition can be the fastest way for it to get to users.”
“Killer acquisitions” are often beneficial for both the startup and the consumer, highlights Will Rinehart, Senior Research Fellow at the Center for Growth and Opportunity. “The evidence of a kill zone in the tech industry is thin.” “The vast majority of acquisitions by large tech companies are made either for the tech or the talent of the target company, not to stifle a future competitor. Both parties benefit from these deals. Startups often have great ideas but lack the technical and marketing resources to bring a product to a wider audience. Large companies, on the other hand, have the resources and consumer base for a new product but often lack innovative ideas. Yet, the true benefactors of these deals are consumers who can now choose an innovative product that may not have existed otherwise.”
Rapid growth in the tech sector directly defies the “kill zone” argument and benefits consumers, as noted by Keith Hylton of Boston University. “Apple’s App Store contains roughly 2 million apps at present. Between 2008 and 2018, the number of apps in Apple’s store increased from 500 to 2 million. This huge rate of growth, 4,000 percent over ten years, is hard to square with the assertion that entry is difficult to encourage within a kill zone.”
“When the platform owner replicates a particular innovative function and integrates the function into the platform, it enhances the entire platform, which is itself a form of innovation with benefits to consumers. The benefits to consumers are necessarily greater with replication and integration of a productive functionality across the entire platform than with the functionality residing exclusively within a stand-alone application residing on the platform.”
Arguments that leading tech services create “kill zones” through data accumulation are unfounded.
Data alone does not lead to a sustainable competitive moat, meaning that incumbents are not untouchable simply due to data possession, notes Greg Back, Free Sky Capital Managing Member. “Data is not destiny. Particularly if you’re on the early-stage side, company building is messy. You’ve got to get so many things right, whether it be people or infrastructure or hiring or fundraising. So what I think what we saw there was a missed opportunity, from an execution standpoint, for MySpace to have evolved into Facebook. Again, it’s easy for us to say ‘this company has this pool of data, they’re going to dominate this space,’ but often times this doesn’t happen because there are so many other things required to be successful.”
Due to data’s diminishing returns, firm defensibility stems from innovation rather than volume, note Martin Casado and Peter Lauten of Andreessen Horowitz. “Yet even with scale effects, our observation is that data is rarely a strong enough moat. Unlike traditional economies of scale, where the economics of fixed, upfront investment can get increasingly favorable with scale over time, the exact opposite dynamic often plays out with data scale effects: The cost of adding unique data to your corpus may actually go up, while the value of incremental data goes down!”
“Of course, the point beyond which the data scale effect diminishes varies by domain. But regardless of exactly when this happens, the ultimate outcome is often the same: the ability to stay ahead of the pack tends to slow down, not speed up, with data scale. Instead of getting stronger, the defensible moat erodes as the data corpus grows and the competition races to catch up.”
The current venture capital investment climate is thriving, encouraging innovation among startups and ultimately benefiting consumers.
“Startups are nourished” in today’s tech sector, notes Ed Black in RealClearMarkets. “The mythical ‘kill-zone,’ where investors won’t invest because of successful incumbent companies, doesn’t exist; startups are nourished, not suffocated, in the current venture capital climate. Actually, VC investment in the tech sector is at a 20-year high, performing exceptionally well compared to venture capital investment in other industries. Investor appetite for these high-risk, high-reward companies clearly shows the dynamism of the tech sector.”
Today’s thriving venture capital investment rejects the conventional “kill zone” wisdom, according to Jim Pethokoukis of the American Enterprise Institute. “Indeed, given all the many areas of interest to Big Tech, one might think there would also be so many kill zones that few startups would get funded. Yet VC investment in the US reached $136.5 billion last year, second only to 2018’s $140 billion.”