Expanding antitrust laws harm startups

Venture capital is the fuel for high-growth startups that have transformed the world. Recent examples include Moderna and Zoom, and past examples include Genentech and eBay. VCs partner with entrepreneurs to build companies. This includes incubating a company within a venture firm, investing in a founder with merely an idea and a business plan, or providing capital and expertise to propel a company as it grows.

For venture-backed companies there are effectively three outcomes: standalone company (often via initial public offering); merger or acquisition; or bankruptcy. Company failure is the most common outcome, but the success stories are often hypergrowth companies with a big impact. Many entrepreneurs and their investors begin the company building process with the hope of creating a standalone, public company. However, in most cases an IPO is not possible, and the preferred exit opportunity becomes an acquisition by another company, with 58% of startups expecting to be acquired.1 Ultimately, approximately 10 times as many startups are acquired than complete an IPO, with 836 venture-backed companies having been acquired in 2019, whereas 82 went public.2

These acquisitions contribute to the health of the startup ecosystem, as entrepreneurs who realize liquidity through the sale of their company regularly go on to found new, innovative companies, and often invest in other startups as angel investors or VCs. Furthermore, acquisitions help power the returns of VC funds, thereby allowing VCs to raise new funds and invest in the next generation of entrepreneurs. This “recycling effect” is one of the key drivers of dynamism in our economy.

Acquisitions more common as public markets have become more hostile to smaller companies

Acquisitions of VC-backed companies have always been more common than IPOs but have become more important to the startup ecosystem in recent years as the public markets have become more challenging for small capitalization companies. The data bears out this reality in stark terms. The number of IPOs per year post-2000 has dropped by more than half relative to the preceding two decades. Companies going public are older than they used to be—the average age of a company undergoing an IPO in the last decade was around 10.7 years as compared to 7.5 years in the 1980s and 8.5 years in the 1990s. Far fewer small capitalization companies go public: between 1980-2000, companies with less than $50 million in annual sales made up about 50 percent of IPOs; post-2000 that number has dropped to about 35 percent. 3

The reality is most young companies cannot realistically achieve the size and scale necessary to survive in the public markets of today. It has become more expensive and significantly more challenging to manage public companies; much of the infrastructure that supported small companies going public has disappeared; and the public markets have unfortunately become more short-term in nature. The frustrating result is that the U.S. now has roughly half the total number of public companies than there were twenty years ago. 4 Acquisition activity for most of these companies represents their only realistic chance of success.

Expanding antitrust law to restrict acquisitions could chill investment into startups

Recent proposals would modify the existing antitrust rules to place the burden on businesses to prove that an acquisition is pro-competitive, even when the acquiring party does not have a history of anti-competitive acquisitions. These proposals could have a chilling effect on the startup and venture ecosystem, as it may make it harder for startups to be acquired; elongate the timeline for liquidity; and increase the regulatory and legal costs of an acquisition. As a result, U.S. R&D and job creation could be jeopardized. As Patricia Nakache of Trinity Ventures testified before the Senate Judiciary Committee in 2019:

If the government makes it more challenging for incumbents to acquire these companies, this will have the devastating effect of making it less attractive to launch a new enterprise and for people like myself to fund and partner with those companies. The end result will be harm to the American innovation economy.”5