Tech Startup Investors Are Wary of Warren's Plan to Protect Them

(Bloomberg) -- Democratic presidential candidate Elizabeth Warren wants to break up Facebook Inc., Amazon.com Inc. and Alphabet Inc.’s Google, saying the tech giants are stifling tech innovation by acquiring startups or running them out of business -- rather than allowing new businesses to thrive.

But on Saturday, when the Massachusetts senator addresses a startup-heavy audience at the South by Southwest festival in Austin, Texas, she’s likely to encounter an industry that isn’t receptive to her message.

Warren laid out the case to dismantle the big companies in a Friday blog post on Medium. She said her administration would regulate large tech acquisitions, in part to encourage venture capitalists to bankroll new ideas without fear of unfair competition. She described the venture industry as “hesitant to fund new startups” that might end up being squashed by existing behemoths.

Indeed, the dominance of a few players has become a common lament in the tech world. “To reach consumers you have to pay Facebook and Google” for advertising and attention, said Garry Tan, co-founder and managing partner of Initialized Capital. Large companies “spend billions of dollars a year on Facebook and Google ads,” he said. “That’s in a nutshell what startups face, but startups are less able to pay.” Tan added that the system had resulted in “perfect monopolies” for Facebook and Google.

Last year, more venture money went to fewer companies. PitchBook-NVCA Venture Monitor says the number of deals in the U.S. fell 5.7 percent in 2018 to 8,948, even as total dollars of venture funding soared to $131 billion.

But that concentration of funding, say many venture investors, is part the industry’s natural ebb and flow. Few venture investors believe that the startup ecosystem needs help from government.

“We haven’t seen any reluctance or hesitation from ourselves or from our co-investors” to back new startups, said Christine Tsai, chief executive officer of 500 Startups, an early-stage fund and accelerator that funded 155 companies last year. “The activities of Facebook and Google don’t impact venture capital activity, at least not at the early stage.”

Menlo Ventures Partner Matt Murphy said Warren’s proposal was surprising, given what he described as an “historic” gush of successful tech companies like Airbnb Inc., Stripe Inc., Uber Technologies Inc., Lyft Inc. and Pinterest Inc. all plotting initial public offerings, and hundreds of other smaller companies continuing to grow.

“If you’re a startup and you can’t figure out something creative and innovative to get around an incumbent, then you probably didn’t have anything too special to begin with,” Murphy said. "Tech has always been a story of David versus Goliath."

He added that because not every company is a good standalone operation, acquisition by larger players can play a critical role in a well-functioning tech industry, in addition to generating returns for investors. Restrictions on those deals, he said, could be counterproductive. Companies like Google and Facebook often acquire venture-backed startups.

Bilal Zuberi, a partner at Lux Capital, also made the argument that tech functioned better without D.C. He tweeted on Friday that Warren was “a really smart person, but utterly wasting her time.”

A spokesman for the industry trade group National Venture Capital Association said “Warren’s plan doesn’t seem to impact VC-backed startups,” but that it would continue to monitor her proposals as more details emerged.

--With assistance from Alistair Barr.

To contact the reporter on this story: Lizette Chapman in San Francisco at lchapman19@bloomberg.net

To contact the editors responsible for this story: Mark Milian at mmilian@bloomberg.net, Anne VanderMey, Alistair Barr

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