President Trump's clampdown on social media could hurt startups and cripple competition with Facebook and Twitter

• President Donald Trump just signed an executive order that cracks down on social media companies, following Twitter's recent decision to add fact-check labels to two of his tweets.
• The order triggers a critical review of a federal law that currently allows online forums such as Twitter and Facebook to host third-party comments without being held liable for all that content, but also allows them to remove material they find objectionable. Trump directed the FCC, the FTC, and other government agencies to consider actions that could force social media companies to publish statements they might otherwise have removed. 
• If the administration succeeds in changing the interpretation of that online shield law, the Communications Decency Act (section 230), social media companies found to be excluding content based on alleged bias might lose their immunity from liability, exposing them to libel suits for defamatory posts by their users, for example.  
• Aside from the many legal concerns raised by the order, some critics warn that the repercussions of the order will also cripple startup competition to Facebook and Twitter. 
• "Mostly it will hit the little sites because they can't afford compliance and liability and insurance," Albert Wenger, the managing partner of Union Square Ventures, told Business Insider. 
• Visit Business Insider's homepage for more stories.

President Donald Trump signed an executive order Thursday that could open social media companies up to federal or state sanctions — a move that closely followed Twitter's decision to add fact-check labels to two of the president's tweets.

The order directs the FCC and FTC to consider changing the interpretation of a federal law that has for decades allowed social media companies and other online forums to host third-party posts without being held responsible for fact-checking that content or removing offensive statements. The proposed sea change in the application of the law, the Communications Decency Act (section 230), has already triggered some heated debate in Silicon Valley on the role that tech companies should play in moderating truth. 

It also revived concerns about tech's competitive landscape among venture capitalists and startup lobbying groups, who worry that the order will create undue financial burdens on startups, and make it harder for them to compete with social media behemoths such as Facebook and Twitter. 

"I think that this will have a reach far beyond the big sites," Albert Wenger, the managing partner of the New York-based venture capital firm Union Square Venture, told Business Insider. "Mostly, it will hit the little sites because they can't afford compliance and liability and insurance."

Menlo Ventures partner Venky Ganesan said he is skeptical that Trump's executive order will survive challenges long enough to accomplish his goals. Ganesan said he expects to see a longer conversation about it among lawmakers.

"I think Trump's reaction to what Twitter is doing is literally pissing in the wind. It's too late, it's out of the bag, and all he is going to do is get dirty," said Ganesan, whose investments include Rover, Redfin and Palo Alto Networks.

Ganesan agreed that changes to Section 230 would make it harder for young startups to thrive. But he ultimately supports holding the big tech companies accountable for the consequences brought about by their platforms. He said he believes they have outgrown the existing regulations.

"It's much more important for society to figure out how to manage and control the flow of information on social media than to help younger start ups," Ganesan said. "There is no point in having startups to compete if you don't have a society to compete in."

More regulation could hurt competition

When they were young startups, companies like Twitter and Facebook were able to rise to a position of global dominance thanks to the protections laid down in Section 230.

The provision says that internet companies won't be held responsible as the "publisher or speaker" of the content posted by others on their platforms. That means the companies won't be held financially or legally liable in instances of libel or harassment committed by their users. 

Section 230 also allows companies like Twitter to moderate the flow of messages they host, and holds that companies won't be held accountable for their voluntary actions to restrict access to content that they deem objectionable, whether or not that material would be considered constitutionally protected as free speech in other forums. 

But Trump's order, announced as a plan to prevent companies from excluding content for reasons he sees as impermissible bias, would restrict the freedom of social media companies to set their own standards.

As longtime observers of the startup ecosystem note, big tech companies can now survive without the shield provided by Section 230. They can afford to insure against bad user behavior, fight the legal battles that arise, and automate the filtration necessary to keep certain types of posts off of their platforms.

But new and emerging startups will not have that luxury, according to the startup advocacy group Engine. 

"Dismantling Section 230 would not only increase the legal risk of hosting any kind of political speech — likely leading to some platforms banning all such content from their sites — it would actually make platforms like Twitter and Facebook more powerful by imposing untenable legal costs that will fall disproportionately on smaller competitors," a statement from Engine said. 

A similar conversation came up in 2018 around FOSTA, a bill to crack down on online sex trafficking. Facebook COO Sheryl Sandberg came out in favor of the bill. Groups like Engine, which supported the original version of FOSTA, pushed back on the Sandberg-supported version because of concerns that it would erode liability protections for tech companies. 

"The big companies are essentially pulling up the ladder behind them," Wenger, who was an early investor in Etsy and Tumblr, said.

That said, Bradley Tusk of Tusk Ventures noted that while altering the law could shape startups' decisions, like not allowing comments on their websites, there are still investors who view the legislation as an opportunity for startups to compete on the marketplace. 

 "If you are working on a new idea in the social networking space, Facebook is the monopoly, so competing with them is hard. The weaker the platforms are, the easier it is for new entrants to the marketplace," Tusk explained.

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