The Cobra Effect

There is a story that there were too many venomous cobras in Delhi in the 1800s. The British colonial government tried to address this by offering a bounty for every dead cobra presented. This led to people farming cobras to be killed for the reward. When the government scrapped the program, the farmers released now-worthless snakes, increasing the feral cobra population (source).

I wonder if Lina Khan knows this story.

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This last weekend, 200+ employees at Windsurf were left stranded, when Google hired away some of the Windsurf team. The founders and a number of the key researchers / engineers (a ~tenth of the ~300 person team) were hired into Google.

This left the remaining 250+ people caught between a rock and a hard place: they did not participate in the exit, they were gutted of key leadership and engineering talent in an intensely competitive environment, and would soon start bleeding revenue. They couldn’t even shut down the company; it would strengthen a potential FTC case that Google effectively acquired the company. Fortunately, Cognition came to the rescue and purchased Windsurf — paying out the employees and hiring them into new roles.

But wait: why didn’t Google just buy Windsurf outright?

This was a “blitzhire” — a transaction where the purchaser surgically removes core talent, leaving the corporate shell and the majority of its employees behind. This has happened often, recently:

• Inflection AI by Microsoft

• Character.ai by Google

• Scale AI by Meta

• Adept by Amazon

This phenomenon can be traced directly back to FTC (and EU commission) antitrust policy, and accelerated by the FTC “shadow veto” instituted by Lina Khan (The Wrath at Khan).

Here’s why:

• Historically, FTC and EU review usually took a year. This limbo kept both the acquirer and target company from being able to operate and advance with any sort of clarity. This is a non-starter with AI acquisitions; a year might as well be a decade.

• This got a lot worse with the Lina Khan regime: aggressive merger challenges and threat letters killed most deals before they even started, specifically for big tech (Google, Microsoft, Meta, Amazon, Apple, etc.).

In an already-uncertain business environment (a pandemic, followed by interest rates hikes), this had a chilling effect on M&A.

On the surface, this seems aligned with the FTC’s mandate: these companies all have a market cap of more than a trillion dollars. They shouldn’t be allowed to get any bigger!

But that’s a misunderstanding. The primary goal of antitrust is improving consumer welfare by promoting competition.

In a hypergrowth environment like tech, the best source of competition is new entrants. And in Silicon Valley, new entrants are fueled by exits. Startups are founded and funded by ex-founders, ex-early employees, and angel investors.

Which brings us to…

Second-order effects

Big tech is the buyer of last resort for a lot of tech startups. In a tough IPO environment, this limitation on exits stifles startup liquidity, and hence angel capital to reinvest back into the ecosystem.

Nobody wants a hard landing (shutting down the company); and without a soft landing, companies to just limp on, as zombies.

Fewer M&A exits means less founder / employee freedom, and liquidity across the board. Less freedom and liquidity means fewer startups. Fewer startups means less competition.

Third-order effects

Given the choice between a year-long review to buy the revenue + product + team, versus acquiring just the team overnight... a big tech buyer would be silly not to pick the latter option. And so, they figured out a workaround: hire away key members of the team, for massive sums ($500M - $15B).

Fourth-order effects

These blitzhire shenanigans have resulted in a major breach of the “social contract.”

Founders are the linchpin of the trust ecosystem. They stake their reputation on their startup, signing up for implicit moral obligations to every stakeholder (employee, investor, customer, partner…). When this contract is voided, the delicate balance unravels.

Why would any employee sign up for a slog — below-market offer, long hours, foregone vacations — if the founders can just go get blitzhired, instead of working shoulder-to-shoulder in the trenches?

The founders took the easy way out here, because the money was probably just too good; I estimated that the founders each made $400-700M (between the acquisition price and a new retention grant from Google).

Some toxic founders I know once said “we’re majority shareholders, so what’s in our best interest is in the shareholders’ best interest.”

I wonder if the founders of Windsurf thought that too.

Every time another founder makes this compromise, it dismantles the startup ecosystem a bit further. If you take away the village — not just the founders, but everyone around them that make it happen — then the precious magic of Silicon Valley dissipates, which clears the way for big tech to cement an unassailable oligopoly. And just like that… the FTC has accomplished the opposite of its mandate, just like the British Raj’s cobra control.

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Our instinct is to condemn the founders, but they're just playing rationally (if selfishly) by the rules of a broken game.

The best founders will honor the social contract... but if even 10% breach it (and they will — $500M is a lot of money), it poisons the well.

To be clear, it's both: we need to expect better of founders, and hold them to it. But also... we need to expect better of our government, and hold them to it. We need a better, clearer, and faster regulatory regime that takes weeks, not years — one that doesn't make the "blitzhire" the most logical path to an exit.

So my question for Andrew Ferguson: you recently reaffirmed Lina Khan's legacy. Look at the wreckage, the gutted companies, and the stranded employees. Is this what protecting the market, what championing the American Dream looks like?