Congress has trained its sights on Big Tech: several antitrust bills have been introduced. But one bill stands apart because it would affect more than large tech companies – it harms American entrepreneurs who launch new enterprises and are responsible for our economic dynamism. Policymakers must take care to protect the startup model that has made the United States the envy of the world.
The Platform Competition and Opportunity Act, sponsored by Senators Amy Klobuchar (D-MN) and Tom Cotton (A-AR), imposes an effective ban on acquisitions of other companies by Apple, Amazon, Facebook, Google, and arguably Microsoft as well. Senators Klobuchar and Cotton have charted this course because they believe large tech companies have been scooping up would-be rivals before they grow to be competitive threats.
As solutions go, the Platform Competition and Opportunity Act is like using a bazooka to kill a fly. Sure, you’ll kill the fly; you will also destroy your house.
Big Tech critics often cite Facebook’s purchases of Instagram and WhatsApp as prominent examples of what needs to be prevented in the future. But these acquisitions are extreme exceptions to the rule and should not drive policymaking. Policymakers should consider the market and the significant benefits that acquisitions provide.
In listening to critics, you might think each acquisition was a Machiavellian effort to crush a potential competitor. Instead, we see large tech companies make acquisitions to help the underlying company run faster and jump higher. In the last few years, Big Tech has acquired VC-backed companies in cybersecurity, cloud computing, medical testing, traffic processing, and education. When such acquisitions occur, a signal is sent to the market that more innovation in these spaces is valued and will be rewarded. That is a good thing.
Acquisitions serve as fuel for the next generation of innovation. Entrepreneurs and employees who realize liquidity through the sale of the company regularly go on to found new, innovative firms. They often become angel investors or venture capitalists and share their expertise and capital with future company builders. This “recycling effect” is one of the key drivers of growth in the U.S. economy, an important component in creating emerging startup ecosystems across the country.
Critics of such acquisitions fail to understand that when a venture capitalist invests in a startup, there are only three possible outcomes: bankruptcy, acquisition, or go public. Company failure is the most common outcome; it’s an unfortunate reality of entrepreneurship. Going public and ringing the bell to open a day’s stock exchange trading is the dream of many aspiring entrepreneurs – but most companies don’t grow to the size necessary to exist on the public markets. That leaves acquisition as the most common and achievable positive outcome for a startup. One survey of founders showed that 58% of founders see an acquisition as “the realistic long-term goal for [the] company.”
But the Platform Competition and Opportunity Act hurts those company builders by taking some of the largest potential acquirers off the field. That leaves founders with fewer options when selling their company and drives down the acquisition price. As with selling a home, when selling a company, it is optimal to have multiple bidders with the financial ability to make the purchase.
Beyond harming startups, the Platform Competition and Opportunity Act could also backfire in its attempt to rein in Big Tech. Serial entrepreneur Bettina Hein has written that by increasing regulatory hurdles and costs, the bill will “likely deepen and widen the competitive moat protecting large incumbent companies from smaller, more innovative challengers.”
The Platform Competition and Opportunity Act may also embolden large tech companies by draining the well of would-be entrepreneurs. Many founders leave their jobs (and lucrative stock options) at large tech firms to strike out on an entrepreneurial journey. If those employees no longer see an acquisition as an option for their startup, the incentive to leave their comfortable Big Tech jobs will be weakened – and new innovative companies may not be created.
The American startup ecosystem is a national treasure. Our country benefits from this ingenuity because we effectively bring together capital, innovation, and smart public policy. But this phenomenon should not be taken for granted, and it can be destroyed by bad policy. That’s why policymakers should reject the Platform Competition and Opportunity Act and instead focus their energy on making the United States the best place in the world to create a high-growth company.
This piece originally appeared in Real Clear Policy.
Jeff Farrah serves as General Counsel at NVCA, where he advocates before Congress, the White House, and agencies for pro-entrepreneurship policies and leads in-house legal matters for the association. He loves working at the intersection of venture, public policy, and the law. Jeff concurrently serves as Treasurer of VenturePAC, the political action committee of NVCA.