Safe Harbors

A person we are working with on Net Neutrality policy wrote this email to me recently and I answered it as follows:

The Email Question:

Many people in D.C. understand that start-ups without significant outside funding won’t be able to pay those fees and won’t be competitive. However, most people think that if a company is able to get venture capital, then it can use the VC funds to pay these fees.

Fred’s post suggests that VCs won’t invest if they fear that the start-up will have to compete with established companies that can pay these fees. Can you help me understand what exactly the problem is? In other words, why can’t VCs simply pay for the access fees and thereby make the application competitive with established companies that can pay? Why would they choose not to invest instead?

My Reply:

the problem, in a nutshell, has to do with how much capital you have to invest upfront to find out if the product or service the startup has created is going to work as a business

on today’s internet, there are no gatekeepers to pay so you can put something on the web or in the app stores for almost nothing and then see if they can get to a million users or more

if they can do that, then you can invest the tens of millions you need to build a real business

this process of trial and error happens over and over again and is the essence of the internet and mobile startup and VC business

one of the reasons, for example, you see so few music startups is that those startups have to negotiate huge upfront payments to the music industry in order to even launch a service. no entrepreneur or investor would invest millions up front when the likelihood is 90% or greater that it will be a failure. so the entrepreneurs either launch without licenses and risk getting sued or they don’t even try

that is what will happen in high bandwidth content apps if this FCC rulemaking goes in the direction we fear it will go