DOJ lawyers ask startup investors about big tech’s ‘kill zones’

On Wednesday, the Department of Justice came to the heart of Silicon Valley to host a workshop on antitrust and startup investing. Around 200 venture capital investors, academics and regulators gathered at Stanford University's law school to debate whether big tech companies stifle innovation, and what role antitrust should play in leveling the playing field.

It was a thoughtful discussion. Within the venture community, people hold very different opinions. A few said of course big tech companies hold smaller ones back! More said that was ridiculous. Others pointed the finger at government regulation as the problem.

Get what matters in tech, in your inbox every morning. Sign up for Source Code.

One idea everyone came back to again and again was this notion of kill zones. These are supposed areas — social media, or search, or cloud, for example — where big tech may be smothering startups, and thereby innovation, or even killing challengers through acquisitions. Antitrust officials want to pinpoint where these kill zones are. A big part of today's workshop was trying to get startup investors to help them figure it out.

In opening remarks Makan Delrahim, the assistant attorney general for the DOJ's antitrust division, made the case that building successful new business is a core part of being an American, saying that VCs and regulators want the same thing. "We both care deeply about market conditions that encourage entrepreneurs to take calculated risks that benefit society," he said. "This sort of risk-taking is part of the success story for any American business, and also a part of our national identity."

Switch Ventures partner Paul Arnold was there, voicing what emerged as an uncommon opinion from within his community: Kill zones are real. Speaking on a panel moderated by DOJ antitrust official David Lawrence, Arnold told the room that the market dominance of big tech companies is, in fact, making it harder for startups, particularly because of the massive user bases of the bigger players — and the enormous amount of data that often comes with that. "It's a really hard barrier to overcome, and sometimes there's an answer, but often it will kill things," he said.

Just the sheer size of some of the competitors has made it harder for some entrepreneurs to raise money for their idea in the face of a market-defining company like Facebook or Google, said Arnold, speaking from his experience as a seed investor. Arnold pointed to LinkedIn as the perfect example. He said he's seen a litany of startups that want to take on LinkedIn and build a new professional network, but none has been able to get a foothold.

"Everybody is dissatisfied with LinkedIn, and every founder thinks there's a better way for it to be done, and they're probably right. It's not that good, but they have a very powerful network effect, and it's incredibly hard to overcome that network effect," he said.

Another kill zone he's seen? Privacy-focused startups that are trying to give individuals new and better ways to control their data — a space that goes directly against the core of a lot of big tech's business models.

"That's as much of a kill space as you can imagine, depending on the idea," Arnold added. "You're getting to the core value proposition of extremely powerful and entrenched companies that do not want to cooperate with that idea, so how do you pull it off? I haven't seen a company yet."

Ram Shriram, one of the earliest investors in Google, sat on the same panel, and disagreed. He said that skepticism about building something in a crowded market was nothing new, and wasn't evidence of kill zones. When he went around Silicon Valley knocking on doors to raise money for Google, he said he heard the same concerns.

"I went up and down Sand Hill and could not get a single VC to get a check at the time. The reason? They said search was taken," said Shriram, the founder of Sherpalo Ventures. Yahoo had been the leader in the search at the time, but then it lost its way and became more of a media company — creating an opening for a startup like Google to come in and do something different.

He's said that experience taught him that big tech companies are not immune to disruption. The opportunity for startups is when there's new technology, like AI companies, that could "create the next big winner that could potentially take out one of these big companies," Shriram said.

In that way, Shriram was echoing what legendary Sequoia investor Michael Moritz had said earlier in the day in a conversation with Stanford law professor Joseph Grundfest, who studies corporate governance. Saying he didn't want to be overly dismissive over market concerns that big tech companies crowding out the competition, Moritz admitted he's "jaded" having heard the refrain before. He harkened back to when companies like Fairchild Semiconductor or IBM or even Microsoft came along and felt unstoppable — only to eventually lose market share to new disruptors.

But he also noted that the would-be-founders coming into his office with the next big idea aren't trying to pitch a business as a direct competitor to Facebook or Google. "I don't think any founder or entrepreneur with their wits about them would say that," he said. "Companies start off with a very narrow focus, and they do one small thing very well, and then they become the best at it, and then they gradually expand."

Instead, in his opinion, the "kill zone" isn't big tech, but government regulation, which he sees as a bigger impediment to innovation, citing taxi medallion commissions as one example.

"More recently I found that the kill zones would consist, depending on which company you're involved with, of deeply entrenched political interests within cities that can really stymie the development of the next generation of hospitality and mobility companies," Moritz said.

The whole day couldn't have felt more timely. Just a day before, the Federal Trade Commission had announced it was going to study the last decade of acquisitions from the five big tech companies — that's Amazon, Facebook, Google, Microsoft and Apple — to get a better understanding of how the hundreds of small mergers these companies have made actually affected their businesses.

The day ended with a look back and an admission that government involvement is part of how the industry got where it currently is.

"Today's discussion reminded me of what's past is prologue. And a couple of times we've talked about the Microsoft case," said Manish Kumar, chief of the DOJ's Antitrust Division's San Francisco office, referring to the 1998 battle that reshaped the industry. "I know minds may differ on this, but I happen to believe that the government's successful case against Microsoft somewhat ironically may well have paved the way and made room for some of the market-leading platforms that were the subject of our conversations today."