Eric Schmidt: Web competition is alive and well — just ask VCs

Google chairman Eric Schmidt

San Francisco startup Hipmunk has received some $5 million in venture capital funding for its nicely designed travel search engine. But does this really mean that it stands to compete with travel offerings from a company like Google, (s GOOG) a search technology leader with a market cap of some $200 billion? Google’s chairman Eric Schmidt thinks so.
For background: Google has come under fire from antitrust authorities for possibly having a too-large competitive advantage because of its dominance in the search engine field. When Eric Schmidt appeared before the Senate’s antitrust subcommittee on September 21 to address the situation, he defended his company’s position, saying that Google is very committed to playing fair and giving its competitors equal treatment in its search results.  Senator Herb Kohl, the chairman of the subcommittee, had some pointed follow-up questions after the hearing, to which Schmidt responded in a written statement released by Google on Friday, November 4.

Startups get press — and sometimes money

One of the more interesting parts of Schmidt’s response had to do with the startup ecosystem. According to Schmidt, the fact that web startups still get funding from VC firms and attention from the press means that industry competition is alive and well. In his statement, he pointed to a handful of startups to illustrate his point:

“There are new entrants in these market segments all the time. A new comparison shopping site, FindTheBest, launched by the co-founder of DoubleClick last year, just raised $6 million in venture funding over the summer. Cheapism is a comparison shopping site that launched in 2009, dedicated to bargain hunters on the Internet and was recognized in the New York Times and on CBS New York… In February of this year, the travel comparison shopping site, Hipmunk, received $4.6 million in venture funding, even as Google continues to expand its own flight search and hotel search functionality.
These are just a few of the many recent entrants in local and comparison shopping that are entering the market even as Google continues to innovate. While they may not all succeed, venture capitalists and entrepreneurs alike continue to believe they can compete with Google, Yelp, Nextag, and other established competitors.”

Actually, Hipmunk raised $4.2 million, and that was in January, not February, of this year. Prior to that, it had taken on an additional $1 million in seed funding — bringing its total backing to about $5.2 million. But Schmidt’s overall point is loud and clear. The question is, does it really hold water?

In M&A, big companies call the shots

It’s true that now is a frothy time in Silicon Valley, with funding rounds and overall enthusiasm for the future of the tech industry running high. But with recent web IPOs meeting mixed amounts of success, the fact is that most venture capital firms are giving startups money with the expectation that they’ll have an M&A exit — that is to say, they will be acquired by a larger tech company like, say, Google. Even though companies like Hipmunk are receiving millions of dollars in funding, companies like Google are still the kings of the industry in many ways.

Still room for new tech royalty?

Despite how rich and powerful big tech companies have become, many smart startups continue to make products that are superior in their own ways. In fact, one of the most annoying things you can ask a web entrepreneur is, “What happens if Google/Microsoft/Amazon decides to get into this space?” That is always a risk, but people start companies because they think their own ideas — and execution — can win out in the end. That big companies often look to capture the magic through M&A is evidence that those entrepreneurs are sometimes right. But is it really proof that newcomers are competing with the big guys on a completely level playing field?
In the end, how the government will eventually weigh in on Google’s specific business practices and how they impact smaller companies in the space remains to be seen. If you have any thoughts about Eric Schmidt’s statements or the ability of startups to compete against the industry’s giants, we’d love to hear them in the comments.