Tech startups are thriving. The COVID-19 pandemic and the corresponding government response created unique problems for facilitating communication, goods, and services. Fortunately, tech innovation helped fill the void, so much so that investors are lining up to get involved.
It’s reported that over 900 tech start-ups are valued at over $1 billion, up from 80 in 2015. Investors have been funding projects feverishly. Their hope, according to seasoned tech entrepreneur Bettina Hein, is to later capitalize on their investment when the startup goes public or is acquired by a larger company.
But the Sarbanes-Oxley and Dodd Frank Acts have made initial public offerings, or IPOs, too expensive for many smaller companies and startups, making acquisition a more obtainable goal for entrepreneurs and their investors.
One piece of legislation introduced in the 117th Congress threatens to stifle the record investment in tech, which would in turn discourage startups from getting off the ground.
The Platform Competition and Opportunity Act of 2021
The Platform Competition and Opportunity Act of 2021 (S. 3197, H.R.3826), introduced by Sen. Amy Klobuchar (D-MN) and Rep. Hakim Jeffries (D-NY) with bipartisan support, would prohibit certain covered platforms from acquiring current, nascent, and even potential competitors. The bill covers platforms with over $600 billion in annual sales or capitalization that also have either 50 million active users or 100,000 active business users a month in the U.S.
CEI’s Jessica Melugin, echoing Hein, points out that the bill would have unintended consequences by disincentivizing tech startups that are ultimately seeking to be acquired by a larger platform:
The profitability of being acquired is now a critical incentive for entrepreneurs to take the risk of starting a new company. To foreclose or diminish that opportunity with regulatory restrictions will reduce the number of new firms founded and funded.
The bill also overlooks the risks taken by established tech companies when acquiring smaller platforms. It’s not always a walk in the park. Mergers and acquisitions fail more than antitrust proponents like to acknowledge.
Twitter purchased the video sharing app Vine in 2012 for $30 million and shut it down after four short years. It’s reported that Vine cost Twitter $10 million a month, with struggling attempts to make revenue. Twitter and Vine failed to keep up with the growing presence of Snapchat and Instagram, which led to the project’s demise.
Facebook, now branded Meta, is also taking risks with its virtual reality acquisitions. The Federal Trade Commission has taken a strong interest in the social media platform’s purchase of the virtual reality company Oculus. The company appears to be going all in on the “Metaverse.” However, doubts regarding the venture are widespread, and it remains to be seen if it will pan out.
Furthermore, some startups don’t sell out. Snapchat, founded in 2011, declined two attempts by Facebook to purchase it. In 2013, Snapchat made zero revenue and rejected a $3 billion offer from Facebook. Then in 2016, Snapchat purportedly again declined Facebook’s invitations to sell and went public the following year.
Nearly every tech platform began as a startup. Some seek to be acquired, and others don’t. No platform is the same, and each offers varied products and services. Their success or failure should be determined by consumer choice, not arbitrary government designations.
In the purported pursuit of competition, the Platform Competition and Opportunity Act would dampen opportunities for startups and new innovative products.
Alex Reinauer is a Research Fellow with the Center for Technology and Innovation at the Competitive Enterprise Institute, focusing on tech policy and antitrust.