The PROTECT IP Act Will Slow Start-up Innovation

As venture capitalists, we believe deeply in the value of decentralized, emergent, start-up innovation. The Internet has been an unusually fertile ground for this type of innovation largely because, for the first time in history, it has been possible to get directly to consumers without negotiating with entrenched intermediaries. The result has been a spectacular explosion of innovation with tremendous benefits to consumers and to the global economy.

McKinsey recently studied thirteen mature national economies and found that over the past five years, 21% of GDP growth can be directly attributed to the Internet. They found that 2.4 jobs were created for every job lost to Internet efficiencies. They also found that over the last fifteen years, an increase in Internet maturity is directly correlated to an average increase in real per capita GDP of $500. By contrast, it took 50 years to see that impact during the industrial revolution of the 19th century.

The Internet is good for the economy. It is also good for consumers. McKinsey found that Internet efficiencies put $64B back in U.S. consumer’s pockets in 2009. The full report is here.

So when considering legislation or regulation that would impact the basic structure of the Internet, we believe that legislators and regulators should be guided by a key tenet of the Hippocratic Oath “FIRST DO NO HARM”.

Earlier today, together with fifty-three venture capitalists from forty firms, we sent a letter to one hundred Senators and a number of Congressman expressing our concern about S. 968, the PROTECT IP Act (“PIPA”). We believe this act, as it is currently written, does not meet this critical test.

The entire letter is available here, but a key section is quoted below:

The bill is ripe for abuse, as it allows rights-holders to require third-parties to block access to and take away revenues sources for online services, with limited oversight and due process.

In particular:

  1. By requiring “information location tools” — potentially encompassing any “director[ies], index[es], reference[s], pointer[s], or hypertext link[s]” — to remove access to entire domains, the bill puts burdens on countless Internet services.
  2. By requiring access to sites to be blocked by Domain Name System providers, it endangers the security and integrity of the Internet.
  3. The bill’s private right of action will no doubt be used by many rights-holders in ways that create significant burdens on legitimate online commerce services. The scope of orders and cost of litigation could be significant, even for companies acting in good faith.

From our perspective as investors, this will substantially increase the risk of investing in an already risky sector. These risks will necessarily reduce the availability of capital for young companies. That could have a serious impact on venture backed start-ups and reduce the number of innovative services available to consumers.

Even worse, we believe the legislation will not make a serious dent on piracy. But it’s unintended consequences will diminish the United States role as a leader in one of the most important and promising sectors of the global economy.

Again from our letter:

While we understand PIPA was originally intended to deal with “rogue” foreign sites, we think PIPA will ultimately put American innovators and investors at a clear disadvantage in the global economy. For one, services dedicated to infringement will simply make their sites easy to find and access in other ways, and determined users who want to find blocked content will simply shift to services outside the reach of U.S. law, in turn giving a leg up to foreign search engines, DNS providers, social networks, and others. Second, PIPA creates a dangerous precedent and a convenient excuse for countries to engage in protectionism and censorship against U.S. services.

Venture capitalists are notoriously apolitical. We believe in markets. We are not asking for tax breaks or favorable regulatory rulings, we are asking for restraint.

The group of venture capitalists who joined us in expressing concern about S. 968, the PROTECT IP Act (“PIPA”) represent a broad range of political views. We share a passion for start-ups like and a conviction that young companies are a fantastic source of productive innovation. This group is responsible for a significant amount of investment in the U.S. economy.

The signatories to this letter work for firms that manage over $13B. We are early investors in services like Facebook, Twitter, Zynga, Skype, Groupon, LinkedIn, Tumblr, Foursquare, and a host of other important web services. The services we have backed now reach over a billion users.

We believe that policy makers understand the importance of this sector of our economy. We hope they will address our concerns.

If you share our concerns, you can follow this link to PopVox and make sure your voice is heard.