The crossfire from friends and colleagues debating net neutrality has caught my attention in recent weeks and got me thinking about how it affects my industry, venture capital. We make our money by investing in startups, of course, which would not, by definition, exist without capitalism. Many of the technology startups we invest in similarly wouldn’t exist without the Internet, as they use it as a platform on which to provide their services.
The capitalistic system on and off the Internet encourages economic growth by the use of free and open markets to distribute goods. While some could argue that a free and open Internet means less regulation and oversight, my experience leads me to believe that an Internet that encourages innovation and startups is one that supports net neutrality — and unless such neutrality is enforced, capitalism on the Internet is in serious jeopardy.
The essence of the net neutrality debate is about the control and management of the publicly subsidized last-mile connection between the consumer and the service provider. Service providers argue against net neutrality because they want the ability to apply policy to the traffic flowing across the last mile, which they claim is the only way operating costs can be controlled, fees can be kept reasonable and service levels can be maintained throughout the network.
From a startup and innovators perspective, service providers need to exist and be profitable. They provide the last mile and global connectivity required by technology startups to operate at any level. They also buy products and services from those startups, and often deploy them at a scale unheard of in other end markets. Customers like that make startups attractive acquisition targets — often resulting in a nice return for a VC fund (see Reliance’s acquisition of Yipes or BT’s acquisition of Ribbit).
Those in favor of net neutrality argue that service providers need to be decoupled from the last-mile infrastructure. The problem is that if service providers are allowed to apply policy to the last mile connecting to the consumer, that policy may be constructed to favor the service provider’s and their partners’ services over a competitive offer from another company, such as a startup.
Imagine, for example, if your service provider had a business relationship with a specific set of e-commerce sites and applied policy that allowed their web sites to load faster and their transactions be completed quicker than yours. Or if your provider applied policy that affected the quality of video streams or voice calls from a competitive service provider or startup. In fact, in some global markets, this is exactly what happens, especially where the service provider is a government-owned or controlled entity. Just ask anyone trying to use voice-over-IP or watch uncensored streaming video in countries like Singapore or China.
More importantly to a VC, imagine funding a startup whose offering depended on the use of a service provider’s last mile. Without net neutrality, there would be no guarantee of a free and open market and by extension no guarantee of the delivery of goods and services. Such an environment would hinder, not foster, innovation and economic growth — core principles of capitalism and venture capital investing. Startups need the ability to buy services from providers on a fair and level playing field — even if their services may compete with those of the provider itself.
Service providers need to accept the fact that net neutrality is the only way that capitalism on the Internet will survive. Without it, venture capital would no longer be able to fund innovative technology startups — the very same startups that will inevitably make service providers’ offering attractive to consumers, as Google, Facebook, Twitter and countless others have done.
This article also appeared on BusinessWeek.com.