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Protocol Pipeline
The inside story of the venture capital and startup world by Biz Carson.

Kill zones and ‘escape valves’: What the antitrust report means for startups

Kill zones and ‘escape valves’: What the antitrust report means for startups

Hello and welcome to Pipeline. This week: "Triller money," Coinbase's blog-post based attrition, and why a recommendation in the antitrust report could threaten startup exits.

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Overheard

  • Is this the Fyre Festival equivalent of a startup? It's hard to know what to make of Triller, the U.S.-based TikTok competitor. Its owners want it to be a "second act" for their careers in Hollywood, which have been mired in controversy, according to The Wall Street Journal. But to get there, it's spending big to recruit stars with fancy creator houses, flashy cars and "Triller money."
  • "5% is pretty bad attrition based on a blog post" Brian Hoffman tweeted. While some people were impressed that "only" 1 in 20 people left Coinbase over its apolitical stance, many people were quick to point that it's a lot of people leaving a hot crypto company in the middle of the pandemic — and Coinbase said there's likely a few more.
  • Finally a CEO who doesn't start their day at 4 a.m. Instead, after waking up, hanging with kids, taking a walk and reading, Spotify founder Daniel Ek doesn't really start his workday until 10:30 a.m., although you could argue being in Europe helps with the time zones.

Biz on Biz

The potential threat to startups in 449 pages of antitrust report

It's been a big week for Big Tech. On Tuesday, Congress finally published the results of its over 15-month-long antitrust investigation into Apple, Amazon, Google and Facebook. And unsurprisingly, the big headlines call for Big Tech to be broken up.

But there's also a lot that's relevant to startups and venture capital buried in the hundreds of pages — including a new recommendation that could potentially limit an "escape valve" for startups that want to exit to dominant companies.

The report is super skeptical that antitrust agencies can actually block anti-competitive mergers. A core theme from the subcommittee's findings is that the big companies "owe part of their dominance" to having bought other companies and eliminated competition along the way.

  • "Since 1998, Amazon, Apple, Facebook and Google collectively have purchased more than 500 companies. The antitrust agencies did not block a single acquisition," the report said.
  • Big chunks of the report focused on a few of the acquisitions it viewed as problematic: Facebook's acquisition of Instagram and WhatsApp, Google's acquisition of Waze, and Amazon's purchase of Ring.
  • Facebook's internal emails looked particularly bad: "I would love to be far more aggressive and nimble in copying competitors … Let's 'copy' (aka super-set) Pinterest!" one executive wrote.
  • The report also accused Amazon of using its Alexa Fund to "inform and improve" its own products. In addition to the Journal's reporting, the report cited two emails where Amazon employees talked about replicating Ring after investing in it: "[I]f we move forward with due diligence, then decide not to buy [Ring], could we have legal issues if we go into the market by ourselves as a competitor and materially impact their business?" one Amazon employee wrote.

VCs, for their part, have been equally skeptical about the report, fixating on a few paragraphs around entrepreneurship.

  • The report cites that there's been a "sharp decline in new business formation" and that funding and startups and the entrepreneurship rate are all falling. This isn't quite true. The report cites studies that ended in 2011, but more recent data from sources like PitchBook and NVCA show deal levels and investment at record-breaking levels since then.
  • Don't mistake that as some smoking gun to the report's validity, or, in Keith Rabois' words, consider it "fake news put out by the government." To do so would be to discount the report's bigger purpose: This won't single-handedly break up Big Tech, but it will certainly influence how lawmakers think about passing new laws.

That's why the recommendations the subcommittee made are worth paying attention to, particularly for startups and venture capitalists.

  • One of the biggest recommendations could be changing the rules for future acquisitions by Big Tech companies by "shifting presumptions."
  • It suggests that any future acquisition made by a dominant platform be presumed anti-competitive unless they can show that it is "necessary for serving the public interest and that similar benefits could not be achieved through internal growth and expansion."
  • "Establishing this presumption would better reflect Congress' preference for growth through ingenuity and investment rather than through acquisition," the report said.

The question is: Does creating a potentially greater barrier to acquisition help or hurt startups?

  • Neo founder and angel investor Ali Partovi said that it wouldn't encourage risk-taking if the rewards are taken away. "Many founders start companies with the dream of selling them, and this dream has fueled innovation and investment for decades. Blocking that path will stifle innovation and investment, the opposite of what Congress seems to intend," he said. "Also, the idea that a deal is 'guilty until proven innocent' feels inconsistent with basic American principles."
  • Already, tech policy groups are very concerned about the suggestion. Netchoice's Carl Szabo, which represents companies including Google and Airbnb, warned my colleague Emily Birnbaum that it could result in less venture investment, particularly in future competitors to dominant players. "You want to have an escape valve where if it's failing, it can be bought, it can sell," he said.
  • Startup advocacy group Engine felt that the report took too narrow of a view. "Making it harder for startups to get acquired — or injecting uncertainty about acquisitions being unwound down the road — will hurt the ability of some new and small tech companies to raise funding and get off the ground," they said.
  • The recommendation also fails to account for the different paths companies take, said Jennifer Huddleston from the American Action Forum, a right-leaning think tank. "There are some startups whose goal is to make an existing product better, who may actually be able to work with one of these big companies in a way that provides a benefit to consumers. There are other startups whose goal is to challenge these companies," she said. "The current system allows for a range of options for that ultimate outcome based off of a product, based off of different skill sets, based off of different teams."
  • But on the flip side, there's concern that the dominance of the tech platforms has already created "kill zones" that make it hard for startups to compete against incumbents.

It's going to be a matter of finding balance, argues Switch Ventures' Paul Arnold.

  • "Two things need to be balanced," he told me. "If you allow too much market concentration to pool too easily, you're going to create this problem for innovation of kill zones. On the other hand, if you don't allow exits of startups through acquisition, you're going to kill innovation funding. If you veer too far on either side, I see innovation destruction."
  • But if the venture capital industry wants to have a say, it will need to speak up. Arnold was one of only a handful of venture capitalists to be quoted in the report and speak directly to the subcommittee, along with Elevation Partners' Roger McNamee. Other names mentioned included Albert Wenger of Union Square Ventures and Sherpalo Ventures' Ram Shriram, who were quoted on some previous remarks made publicly. Otherwise, there's at least one "cloud investor" who was quoted anonymously.
  • "I do think that the venture industry is scared to criticize Big Tech even when it would frankly help the venture industry to have heightened antitrust review of Big Tech," Arnold said. "Antitrust, done well, will improve the startup ecosystem." He'll leave it up to lawmakers, though, to find that balance of helping startups without throttling innovation.

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Inside Track

  • SPACs are one way to reinvent the IPO, but Reid Hoffman argues they're also a chance to do venture capital at scale and not have VCs "roll off" boards the minute a company goes public.
  • Y Combinator may have minted some of tech's most successful startups, but it has had its share of failures, too. Failory sorted through the failed startups, from the most well-funded to ones that are probably more indicative of the average YC failure.
  • Why has every social platform launched a story component (even LinkedIn)? Facebook's Eric Feng says it's the perfect sweet spot of easy to create and easy to tell a story at the same time.

Need to Know

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