Net Neutrality & Venture Capitalism: How Ruling Hurts Tech Startups, Internet Innovation

Reactions to Tuesday's court decision to kill the Federal Trade Commission’s Open Internet Rules, better known as net neutrality rules, have come from all directions.

The International Business Times showed how Netflix monthly subscription fees could rise as much as $4.80 per user for high-definition streams, thanks to Internet service providers charging extra for the bandwidth. The chairman of the FCC, Tom Wheeler, also weighed in on the decision, albeit in a tepid and confusing manner.

Entrepreneurs also worry about the effect on startup Internet companies. Without the cash flow that major companies enjoy, startups might not be able to afford the fees necessary to deliver content to customers.

Fred Wilson, a managing partner at Union Square Ventures (whose portfolio includes companies like Twitter, Tumblr, Etsy and many more), wrote about the effect the court ruling on net neutrality will have on tech startups from the perspective of a venture capitalist. Wilson said that without net neutrality rules, the environment for investors and entrepreneurs will become a “nightmare.”

Telecommunication companies "will pick their preferred partners, subsidize the data costs for those apps, and make it much harder for new entrants to compete with the incumbents,” Wilson warned on his blog, AVC.

Wilson imagines three entrepreneurs pitching great ideas to a venture capitalist and then describes how a venture capitalist is likely to respond in a world without net neutrality.

First, Wilson images a new music streaming service that helps users find and listen to new music that is playing live in their city. While established companies like Spotify, Beats and Apple could afford paying fees to ISPs to make their services free on mobile networks, a startup might not have this luxury. The company would have a hard time attracting users because it would simply be too expensive to use the service, making it difficult for venture capitalists to invest.

The same idea applies to a startup video streaming service or a new photo-sharing app. Big companies already have the income to pay ISPs for their data fees without having to pass it along to customers. A startup just couldn’t make it.

“We love your idea and would have funded it right here in the meeting back in the good old days of the open Internet, but we can’t do that anymore,” Wilson wrote from the perspective of the hypothetical venture capitalist.

“This is the Internet 3.0,” Wilson continued. “With [Tuesday’s] court ruling saying that the FCC cannot implement the net neutrality rules they adopted a while back, this nightmare is a likely reality.”

Do you agree that the end of net neutrality will hamper Internet innovation? Let us know in the comments.