Can Startups Become Commercially Viable Without Acquisitions?
August 13, 2021
For decades, the prospect of a dream acquisition by a large company has driven startups to innovate by developing the next “killer app.” The acquisition model leaves founders and their employees with fortunes, relieves them of the need to scale and monetize their technology, and often results in them serving in high-level executive positions under the parent company (see Will Cathcart, still heading WhatsApp owned by Facebook) – or with enough capital to fund their next startup (see PayPal’s Elon Musk, currently packing his bags for Mars).
For decades now, large companies and platform hubs have in effect acted as bottomless venture capital funds, encouraging and developing outside technologies. What will happen now that Washington, D.C., is working overtime to kill these incentives?
If Sen. Amy Klobuchar manages to pass her antitrust legislation, corporations seeking mergers and acquisitions would need to prove – in advance – that a proposed deal would do no harm to competition. In many cases, measuring competitive harm is a highly subjective enterprise, a warning to any executive that a different interpretation of the law, facts or economics of a deal could result in prosecution.
Even if Klobuchar’s legislation outlawing “predatory” acquisitions fails to pass, the steroidal regulators at the Federal Trade Commission, the Department of Justice antitrust division and the White House – Lina Khan, Jonathan Kanter and Timothy Wu – stand over every potential deal like a trio of housemothers showing up at a raucous frat party. Talk about a buzz kill for innovators!
Does their “predatory” argument even make sense? Jonathan M. Barnett of the University of Southern California School of Law, writing in Bloomberg, reports that there is no existing research confirming instances of “predatory” acquisitions as a general phenomenon.
He points to a well-regarded paper conducted by scholars at the London School of Business and Yale School of Management, which defines “killer acquisitions” as those solely meant to choke off innovation and preempt a future competitor. In the pharmaceutical space, these scholars found that only 5.3 to 7.4 percent of all acquisitions could be characterized in this way. Israel’s competition authority examined acquisitions of Israeli firms by large foreign companies over a recent five-year period, and could not find even a single “killer acquisition.” Even under the London-Yale standard, that would mean that almost 95 percent of all acquisitions are not harmful. If they increase efficiency, they should be beneficial to the market, competition, and ultimately to consumers. Yet all of them under the current standard run the risk of falling under the rubric of being “predatory” and anti-competitive.
This makes no sense, as Barnett makes clear:
This exit-by-M&A pathway has been facilitated by the fact that regulators have generally viewed acquisitions of startups by incumbents as posing little risk to competition. The logic is straightforward.
If an emergent firm represents a small portion of a much larger market, the transaction is unlikely to increase the acquirer’s market power, and hence, consumer harm is unlikely.
Barnett speculates that startups will now have to look instead to IPOs and internal growth. This means that technologists will have to transform themselves into CEOs and marketing geniuses. Many gifted innovators are simply not good at such tasks, or able to find the right people to commercialize their innovations. How all this will shake out is not clear, but it is foolish in the extreme for the Biden Administration – and their antitrust Republican enablers – to pretend that these policies will boost innovation, create more jobs or benefit consumers.