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By Brent Kendall 

PALO ALTO, Calif. -- Top Justice Department antitrust officials went to the heart of Silicon Valley to ask whether industry dominance by a few large tech companies is hurting venture-capital investment in startup firms that could be tomorrow's competitors.

"Antitrust enforcers and venture capitalists both depend on making sure that these types of bets -- in good ideas and in great entrepreneurs -- are encouraged and rewarded," the Justice Department's antitrust chief, Makan Delrahim, said at an event the department hosted Wednesday with Stanford University.

Mr. Delrahim said the department was interested in issues including whether top digital platforms are so dominant that investors aren't willing to fund the development of new products that rely on those platforms. The department also wanted the VC community's views on the likelihood that future disruptive companies will be able to challenge today's current technology giants, he said.

The conference came as the department is examining whether tech companies such as Alphabet Inc.'s Google, Facebook Inc., Amazon.com Inc. and Apple Inc. are using dominant market positions to suppress competition. The event was attended by several Justice Department lawyers running and overseeing the investigation.

In a discussion of whether big tech companies have created "kill zones" in their relevant markets, making investments in new startups in those markets no longer worthwhile, Switch Ventures founder Paul Arnold said it is often easier and more attractive to invest in fragmented industries than highly concentrated ones. For businesses looking to develop a product in a market dominated by a tech giant, "It's a really hard barrier to overcome," he said.

Dominant tech companies "are major dampeners to innovation in certain areas," Mr. Arnold said.

Ram Shriram, an Alphabet board member who was one of Google's early investors and is the managing partner of Sherpalo Ventures, pushed back.

"I think the funding will be there if the idea is interesting enough," Mr. Shriram said. Google, he said, underscored the point. When the company was getting off the ground, some investors voiced doubts, saying the search market was already taken by Yahoo, he said. But, "there was an opening for a new entrant to come in and do something different."

The Stanford event also came on the heels of an announcement Tuesday by the Federal Trade Commission, which shares antitrust authority with the Justice Department, that it would study 10 years' worth of past acquisitions by Google, Facebook, Apple, Amazon and Microsoft Corp., to determine whether they bought up fledgling firms to remove them as potential future competitors.

Some panelists Wednesday said more scrutiny of acquisitions by powerful incumbent companies made sense.

Venture capitalists want to get paid, and in a world where there are now fewer IPOs, that often means startups are going to be bought by the dominant company in the market, said Stanford law professor Mark Lemley. "The result is we're reinforcing concentration in the tech industry," he said.

Tech strategist Ben Thompson, who writes the Stratechery newsletter, warned against antitrust enforcers taking too dim a view of established tech companies buying startups just because of a high-profile example of a dominant firm buying the next big thing.

"The reality is Instagram looms over the discussion," Mr. Thompson said, referring to Facebook's purchase of the popular photo-sharing service in 2012, a deal that was allowed at the time by the FTC. It would be great if Instagram were still independent, but most tech acquisitions of startups don't fit that pattern, and the government needs to be careful not to "obliterate the opportunities for the other 99%," he said.

Write to Brent Kendall at brent.kendall@wsj.com

(END) Dow Jones Newswires

February 13, 2020 08:40 ET (13:40 GMT)

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