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May 11, 2016

Venture Capitalists and Copyright: Smug Alert!

 
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HBO’s “Silicon Valley” has built a successful show satirizing the real Silicon Valley’s hubris and worst excesses. Many of the funniest moments follow the struggles of the protagonists with various venture capitalists who have invested in their business (Russ Hanneman anyone?). VCs – or “Angel Investors” – are the demigods of Silicon Valley. Their decisions can make or break companies. As such, they hold a special place in tech circles and their opinions are given a lot of deference.

It’s this VC worship that likely led Silicon Valley-backed intellectual property skeptic advocacy group Engine to commission a 2014 survey of investors (and law firms that advise them) concluding VCs may be less likely to invest in “digital content intermediaries” (firms like YouTube) if the company were exposed to legal risk for copyright infringing content on their sites.

The notion that investors account for legal liability as they choose their investments isn’t insightful or new. And the idea that a VC might choose not to invest in a new business built on facilitating access to unlicensed copyrighted content shouldn’t be either.

This “innovation at all costs” mentality, which seems to fuel the Engine report, reminded me of a 2013 Wired article discussing Silicon Valley’s “threadbare nature of digital exceptionalism.”

The undue emphasis placed on entrepreneurship, combined with a limited view of who “counts” as an entrepreneur, functions to exclude entire categories of people from ascending to the upper echelon of the industry. And the ideal of authenticity privileges a particular type of self-presentation that encourages people to strategically apply business logics to the way they see themselves and others.

I don’t agree with everything in the article, but the Engine report reflects this self-serving worldview. For instance, copyright laws aren’t written to reduce risk for billionaire VCs – they’re written to incentivize the creation of new cultural works, which benefit us all. In fact, when VC’s want to invest, they are reassured by strong patents. So it’s not at all surprising that VCs would want strong intellectual property protections for their investments but weak rights for those they intend to consume. But don’t those on the other side of the transaction naturally want and deserve similar intellectual property protection?

Further, the report pays no attention to the effect weak IP laws and rampant theft has on investment in new content – a relationship explored by researchers at Carnegie Mellon University – who concluded that “our study provides affirmative evidence on a central tenet of copyright policy, that stronger effective copyright protection effects more creation.” In other words, if you’re a VC investor in content rather than in digital intermediaries, you have a whole different attitude toward copyright. What’s more, the authors could have benefited from some discussions with individual creators like Grammy Award winning composer Maria Schneider, who in this video of congressional testimony describes the obstacles she faces to protecting her work online – which reduces her time and incentive to create. Instead, the authors limited themselves to the interests of venture capital funds and white shoe law firms.

There’s also a notable disconnect between what seems to concern real VCs and entrepreneurs and what their advocacy groups say concerns them. For instance, legendary VC Bill Gurley recently published a 5,500 word essay sounding the alarm about investor over-exuberance in the “Unicorn” market (unicorns are startups valued over $1 billion). Per Gurley:

The reason we are all in this mess is because of the excessive amounts of capital that have poured into the VC-backed startup market. This glut of capital has led to (1) record high burn rates, likely 5-10x those of the 1999 timeframe, (2) most companies operating far, far away from profitability, (3) excessively intense competition driven by access to said capital, (4) delayed or non-existent liquidity for employees and investors, and (5) the aforementioned solicitous fundraising practices [fundraising rounds that include terms dangerous to the companies health]. More money will not solve any of these problems — it will only contribute to them. The healthiest thing that could possibly happen is a dramatic increase in the real cost of capital and a return to an appreciation for sound business execution.

Gurley makes no mention of copyright laws inhibiting investing. Rather, he sees bad business fundamentals, easy money, predatory investors, and shabby treatment of employees as huge risks to startups and investors. And he thinks there’s too much money in the system, as oppose to scared investors unwilling to take risks on new companies.

Additionally, entrepreneurs themselves aren’t concerned about copyright liability. A recent ICANN commissioned report by the Boston Consulting Group concluded that the largest impediment to the growth of the online economy is lack of adequate broadband infrastructure – particularly in developing markets.  And Small and Medium Size Enterprises looking to participate in the online economy are worried about data security, privacy, and the lack of “reliability of intellectual property rights online.”

When thinking about the role of IP in the digital economy Silicon Valley luminary Jaron Lanier perhaps said it best in a recent WIPO Magazine interview:

If we expect computers to pilot cars and operate factories, the employment that is left should be the creative stuff, the expression, the IP. But if we undermine that, we are creating an employment crisis of mass proportions… That's where IP comes in. The general principle that we pay people for their information and contributions is critical if we want people to live with dignity as machines get better.

In contrast to Lanier, the Engine Report’s motivations seem cartoonish.

VCs play a critical role in the growth of our innovation economy, as investors always have. But the key to a flourishing economy is that the rights of all parties are equally respected and equally protected in law, instead of one side of the transaction using the heavy hand of government to weaken the rights on the other side.




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