**Venture Predation: How Predatory Pricing is Harming Innovation and Competition**
The venture capital industry in the U.S. is worth a staggering $234 billion, and globally it amounts to a whopping $709 billion. Venture capital has been instrumental in the success of tech giants like Meta and Amazon. However, recent research conducted by lawyers Matt Wansley and Sam Weinstein from Yeshiva University’s Cardozo School of Law suggests that some of Silicon Valley’s biggest darlings, such as Uber, have achieved success through an illegal pricing strategy. This strategy, known as “venture predation,” poses significant challenges to competition and innovation. In this article, we will delve into the concept of predatory pricing, its implications, and how venture predation is shaping the industry.
**Defining Predatory Pricing**
Predatory pricing is a practice wherein a dominant corporation with a substantial market share deliberately lowers its prices to eliminate competition and gain control over the market. This strategy, employed by companies like Uber and Amazon, involves selling goods or services below cost, thereby operating at a loss initially. Once the competition has been effectively eliminated, the company raises its prices to unsustainable levels, aiming to recoup its previous losses. Predatory pricing violates antitrust laws and undermines fair market competition, which is essential for a thriving economy.
**Challenges in Proving Predatory Pricing**
Proving instances of predatory pricing in court has become increasingly difficult, in part due to the influence of the Chicago School of economists on two key Supreme Court cases. In these cases, Matsushita Electric Industry v. Zenith Radio (1986) and Brooke Group v. Brown & Williamson Tobacco (1993), the court expressed skepticism towards the prevalence and success of predatory pricing strategies. The burden of proof in such cases became more stringent, requiring plaintiffs to demonstrate that the defendant priced below cost with a reasonable prospect or dangerous probability of recouping its losses. However, no plaintiff has succeeded in proving a case of predatory pricing since the Brooke Group decision.
**Venture Predation: A New Approach**
Wansley and Weinstein introduce the concept of “venture predation,” a strategy used by venture capitalists that challenges the notion that predatory pricing is rarely attempted. They outline a three-step process behind venture predation. First, venture capitalists infuse a startup, referred to as the “venture predator,” with substantial investments. The startup then uses its financial resources to offer products or services below cost, leading to the elimination of competition and rapid market share acquisition. Once the startup establishes dominance, venture capitalists, along with startup founders, exit the venture through an acquisition or initial public offering, selling their shares to investors who believe the startup can recover the costs incurred through predation.
**The Role of Venture Capitalists**
The motivation for venture capitalists to engage in predation stems from the “power law,” a phenomenon where the majority of startups in their portfolios fail or only experience modest growth. The returns required to offset these losses must come from the rare success stories that achieve explosive growth. As a result, venture capitalists become focused on upside potential and less sensitive to downside risk. They actively seek out startups with the potential for rapid, exponential growth and encourage them to take risks in order to realize this potential.
**The Social Cost of Venture Predation**
Wansley and Weinstein highlight the significant detrimental impact of venture predation, particularly in relation to innovation. By directing capital towards anticompetitive practices rather than socially beneficial and productive products, venture capitalists, who claim to foster innovation, actually stifle it. The resultant misallocation of resources is both wasteful and counterproductive. Additionally, consumers suffer from reduced choice and higher prices, while the lack of market competition leads to lower-quality products.
**A Shift in Approach**
While venture predation is not believed to be pervasive in the industry, Wansley and Weinstein argue that the potential for it to become a fallback strategy is indeed present. Preventing venture predation could have significant implications for the industry and deter the implementation of predatory pricing practices. As awareness grows among venture capitalists and late-stage investors about the likelihood of facing predatory pricing cases, they may be dissuaded from pursuing this strategy altogether.
The emergence of venture predation has shed light on a previously overlooked aspect of predatory pricing. This illegal pricing strategy, employed by tech giants and facilitated by venture capitalists, poses a serious threat to competition and innovation. The research conducted by Wansley and Weinstein offers valuable insights into the social and economic costs of venture predation. As the industry becomes more aware of these implications, there is hope that the prevalence of predatory pricing practices will decline, fostering a more fair and innovative market environment.