The Wrath at Khan
8 min read
Reid Hoffman, the LinkedIn founder and Democratic megadonor, seems to love almost everything about the Biden administration. And, he says, he’s “thrilled” by the prospect of a Kamala Harris presidency. That’s why he’s donating $10 million to support her campaign.
He has just one request: Fire Lina Khan. In a July interview with CNN, Hoffman accused the FTC chair of “waging war” on American business and said he hoped Harris would “replace her” if elected as president. That same week, another prominent Harris donor, the media and technology executive Barry Diller, told CNBC that Khan is a “dope” who’s against “almost anything” that would help American businesses grow.
Hoffman and Diller have plenty of personal reasons—billions, even—to oppose Khan. Hoffman sits on the board of Microsoft, whose $69 billion acquisition of Activision Blizzard the FTC tried and failed to block. Microsoft is also being investigated by the agency for its licensing deal with an AI company that Hoffman co-founded. (In a follow-up interview with CNN’s Jake Tapper, Hoffman stressed that his opinion on Khan was offered in his capacity as an “expert,” not as a donor. This parsing caused Tapper to respond, incredulously, “But there aren’t, like, a hundred Reid Hoffmans!”) Some of Diller’s companies, too, are reportedly under investigation by the FTC.
Hoffman says, however, that he is motivated by concern for the little guy. The FTC under Khan has become more aggressive in seeking to block acquisitions—particularly by tech giants—than it has been in decades. The same goes for the Department of Justice Antitrust Division under Jonathan Kanter. If the agencies keep it up, Hoffman argues, then start-ups won’t be able to cash out by selling to a bigger company, and investors will stop giving them money in the first place. “That’s going to quell investment, and that’s bad for creating new competitors,” he told Tapper. (Hoffman declined to be interviewed for this article.)
This argument is gaining adherents among Khan’s detractors in Silicon Valley on both the left and the right. In a July blog post, the Trump-supporting venture capitalist Marc Andreessen complained that regulators “are punitively blocking startups from being acquired by the same big companies the government is preferencing in so many other ways.” In 2021, the National Venture Capital Association warned that “expanding antitrust law to restrict acquisitions could chill investment into startups.” Now that’s precisely what’s happening, NVCA president and CEO Bobby Franklin told me in an interview.
The question of what antitrust means for tech start-ups might seem obscure during the home stretch of an election in which nitty-gritty policy appears to hardly matter. But the outcome of the fight over the FTC, should Harris become president, could say a great deal about how she will govern. The commitment to strong antitrust enforcement has been a pillar of the Biden administration’s populist economic agenda. Hoffman and company are now challenging that agenda on its own terms. Do they have a point?
For most of the 20th century, a business hoping to expand was generally looking to go public, which would reward employees and long-term investors for creating a sustainable enterprise. The venture-capital model that emerged over the past few decades has a different blueprint for success. VCs plow money into a company at its inception, typically pushing it to prioritize rapid growth over generating revenue—let alone profits—and they expect a quick return on investment. More often than not, the goal of VCs is to find a buyer. According to an NVCA survey from 2020, 58 percent of American founders hope to sell their company. Others will do so grudgingly. In the early 1990s, about 70 percent of venture-backed exits were IPOs, and the rest were acquisitions. Nowadays, acquisitions make up about 90 percent of exits.
So naturally, antitrust enforcement—and blocking mergers in particular—is going to alarm VCs. If big companies are prevented or discouraged from buying smaller ones, they argue, then start-ups will have fewer suitors competing to acquire them. Their valuations will in turn be lower, and fewer of them will get funding in the first place, because VCs will be less confident of a big acquisition-fueled payout. “For me to make an investment in a company, I have to believe that an exit is possible in the first place,” Bradley Tusk, the Democratic political strategist turned investor who runs Tusk Venture Partners, told me.
Khan’s Silicon Valley critics point out that merger activity is down by about half since 2021, when Khan and Jonathan Kanter took over. VC investment has dropped too: The number of deals has declined by 20 percent, and deal value has been cut in half, according to PitchBook. “It appears that the cage-rattling has had an impact,” Susan Woodward, the founder of Sand Hill Econometrics, told me.
When you take the long view, however, funding levels don’t look so bad. Current VC investment is roughly on par with that of 2019. According to the latest report by Silicon Valley Bank, “There is still more money flowing to founders than 26 of the last 30 years.” If anything, 2021 was the anomaly. Juiced by interest-rate cuts, that year saw an unprecedented boom in investment. “It was stupid,” Tusk acknowledged. “Valuations were way too high.” Which makes the current landscape look more like a healthy correction than a crisis. VC investment now appears to be ticking up compared with 2023, according to analysis by PitchBook and the NVCA.
What about start-up formation generally—are fewer founders founding? According to PitchBook, the number of pre-seed and seed deals expected to close in 2024—that is, investments in new start-ups—is roughly the same as before the pandemic. Meanwhile, outside the VC-driven world of Silicon Valley, small business is booming. Applications to start new businesses surged during the pandemic and have not slowed down. Score one for the little guy.
Tightening the rules on mergers of course means fewer mergers. In terms of raw numbers, the shift in enforcement hasn’t been drastic. The antitrust agencies’ newfound boldness appears more in which cases they bring, and their willingness to go to trial rather than settle, than in the proportion of mergers that get challenged.Antitrust advocates say they’re not opposed to acquisitions generally—just the ones that reduce competition. That includes so-called killer acquisitions, in which a bigger company buys a rival start-up in order to snuff it out. A well-known study published in 2021 conservatively estimated that about 6 percent of acquisitions in the pharmaceutical industry fit that description. John Kwoka, an economist at Northeastern University who has advised the FTC, told me that the structure of the acquisition market gives the big players an incentive to catch and kill. “Who’s going to pay the most for a new bright idea? It will always be the company that feels most threatened by it,” Kwoka said.
The killing can be unintentional too—less murder than manslaughter. Mark Lemley, an intellectual-property expert at Stanford Law School and one of the most cited American legal scholars ever, argues that in many cases, larger companies simply don’t know how to deploy the technology they acquire without hurting their original business. Twitter bought Vine, the beloved short-form video platform, then abruptly shut it down. Sometimes the bureaucracy of the parent company saps the dynamism that the start-up had. Plus, when founders sell their equity and become salaried employees, they lose the incentive to shoot the moon. As a result, acquired companies often “disappear and are never heard from again,” Lemley told me.
Tim Wu, a professor at Columbia Law School who served as Joe Biden’s antitrust adviser in the White House, told me that, in a lax antitrust environment, tech start-ups might be more numerous but “are more likely to build complementary, often low-impact products seeking acquisition.” Strong antitrust enforcement, by contrast, makes start-ups more likely to think big and compete with the giants head-on. Wu cited the period of the 1970s and ’80s when enforcement was relatively strong, which gave rise to enduring companies such as Apple, Microsoft, Oracle, Sun, Lotus, Dell, and others.
Tech entrepreneurs I spoke with offered evenhanded analyses of antitrust policy, recognizing the importance of restraining monopolies while allowing innovative start-ups to find funding—including via acquisition. But these founders emphasized that the most exciting part of starting a company isn’t the prospect of getting bought by Meta or Amazon or Google. Angela Hoover co-founded the AI-powered search assistant Andi with the goal of “taking on Google,” she told me—not getting bought by Google. “Our hope,” she said, “is to take it all the way.”
No one is saying that all mergers are bad. Some companies create widgets that should be integrated into the larger corporate machinery rather than being forced to survive on their own. Some entrepreneurs are good at inventing things but have no idea what to do with their creations. The question is where to set the balance.
Antitrust advocates say we tried lax enforcement for decades and saw the results. “We ran the experiment of a permissive policy, and what we have is the emergence of these behemoths,” Kwoka said. Presumably there’s a point at which the crackdown could go too far, but given the continued dominance of the giants, we’re not there yet.
A surprisingly diverse set of bedfellows agrees. Republican vice-presidential nominee J. D. Vance has praised Khan’s efforts, arguing that keeping Google in check will prevent it from stifling speech. A group of more than 700 Silicon Valley investors signed a letter endorsing Harris in July, and some VCs are promoting Khan’s agenda. Garry Tan, the CEO of the start-up incubator Y Combinator and an aggressive critic of San Francisco’s political left, has praised Khan as “fighting for innovation.” Last October, Tan was asked on X if there was a tension between supporting start-ups, on the one hand, and cracking down on mergers, on the other. “Ultimately even if you want an exit via M&A it’s better to have 5 companies competing to buy you rather than 1-2,” Tan replied. “Selling to monopolist with gun to your head is not the only fate.”
Reid Hoffman is right that VC investment has helped many businesses get off the ground. Still, it’s worth asking whether the exit-via-acquisition model creates the most value for society. That model has become dominant for many reasons—IPOs have gotten more expensive, for one—but it could also reflect a kind of learned helplessness: If you can’t beat ’em, get acquired by ’em. Mark Lemley argues that this paradigm produces less ambitious start-ups. If your goal is to get bought by one of the Big Tech companies—or even if that’s just a likely outcome—you’re less inclined to challenge an incumbent. Any founder who starts a company with the explicit goal of getting acquired, Lemley said, “would much prefer to have no antitrust law. But if that’s what you’re doing, it’s not obvious that you’re benefiting the world at all.”
