The DOJ Asks Startup Investors: Are Tech Giants Too Powerful?

Whether the largest tech companies have too much power has become a common question in Washington, DC. The House Antitrust subcommittee and Federal Trade Commission both have active investigations on the topic. On Wednesday, the Department of Justice took the matter of big tech’s power and what—if anything—to do about it to the industry’s heart, in Silicon Valley.

The department’s antitrust division joined with Stanford Law School to host a day-long workshop on antitrust and venture capital at the campus that spawned many major tech companies, including Google. Makan Delrahim, assistant attorney general for antitrust, described it as a fact-finding mission. He wanted to know whether investors believe it’s likely or even possible for new entrants to disrupt dominant technology companies. “Are investors not willing to develop technology that challenges those platforms?” he asked.

Some investors present said they were not—and signaled openness to government action to make it easier to take on giants like Facebook, Google, and Microsoft.

“I don’t tend to think they’re an existential threat to the venture industry, but they’re a major damper on innovation in certain areas,” said Paul Arnold, founder and partner at Switch Ventures, which works with early-stage tech companies. He gave the example of companies trying to offer consumers new models for privacy or control of their data. “That’s the biggest kill space you can imagine,” he said. “You’re getting into a space with very powerful entrenched companies.”

Presidential candidates Elizabeth Warren and Bernie Sanders have said they would like entrenched companies like Amazon and Facebook literally cut down to size, by breaking them up. Unsurprisingly, the idea didn’t seem to have much support among the VCs and lawyers assembled by the DOJ on Wednesday. But some investors said they could support other interventions to increase competition, such as requiring companies like Facebook to allow outsiders to build products that plug into its data or systems.

One of them was Ram Shriram, one of the first to invest in Google, a member of the company’s board, and managing partner at Sherpalo Ventures. “It’s important to consider data portability,” he said. “I would say that’s a sensible idea.” Arnold also backed the concept.

Wednesday’s meeting took place the day after the FTC told Google parent Alphabet, Amazon, Apple, Facebook, and Microsoft that it will reexamine hundreds of acquisitions from the past decade that were too small to trigger antitrust review at the time. The commission said it hopes to learn more about acquisition strategies and whether they are used to unfairly kill off nascent or potential competitors.

Stanford professor Mark Lemley believes that’s a smart move, because the current culture of acquisitions in the tech industry is a problem. He recently coauthored a paper arguing that increased regulation has discouraged IPOs, pushing founders and investors to build companies that will be acquisition targets for incumbents rather than sustainable enterprises that could challenge them. Tech giants are so large and cash-rich that they’re incentivized to buy rivals early, but not always to nurture what they’ve bought, he says.

“The way we’ve traditionally dealt with dominant incumbents is through cycles of competition, but that’s really stalled in the last 15 years,” Lemley says. He favors regulatory changes to make IPOs easier for startups, and for investors to trade stakes in private companies.

Others close to tech investing don’t see problems with the power of big tech. Michael Moritz, a partner at Sequoia Capital and an early investor in Google and other tech companies, said that carping about big technology companies was a long tradition in tech but that challengers always appear. “I’ve heard this argument for decades,” he said, suggesting outsiders such as regulators and politicians don’t understand the industry. “The view always looks different from afar,” he said.

Susan Woodward, previously chief economist at the SEC and now cofounder of analysts Sand Hill Econometrics, showed figures Wednesday charting healthy growth in the funds available to venture capital firms—perhaps suggesting that investors don’t think big tech companies have made investing in new tech pointless.

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