Big fish theory: A three decades long Wave of Acquisitions May Have Shielded Big Tech from Competition

Recommendable! Food for thought!

However, there are possible flaws with this study:

1. Startup companies were not forced to sell to larger competitors.
2. Startup owners immediately obtained large amounts of money from the sale that would have enabled them to setup or finance another, possibly even better company or product.
3. It appears, the authors do not discuss the effect of patents. If I am not mistaken, then companies like Google, Facebook/Meta, Amazon, and Microsoft were also very busy patenting all kinds of technology. E.g. how relevant or trivial were these patents?

"When Facebook announced in 2012 that it was acquiring Instagram for $1 billion, many critics questioned the decision to pay such a huge amount for a tiny startup with no revenue. Florian Ederer, an associate professor of economics at Yale SOM, remembers telling his MBA students, “This makes no sense.”

In retrospect, Facebook’s acquisition looks like a canny business move to strengthen its social media dominance—and in the last few years, lawmakers and regulators have alleged that the deal was intended to suppress competition. If Instagram were a standalone business today, it might pose a credible threat to Facebook (now called Meta). But at the time, people didn’t fully recognize Instagram’s potential to compete with the popular social media network.

Those companies that have been particularly voracious acquirers of VC-backed startups are also ones that have become increasingly insulated from product market competition.

In a new study ... investigated whether the huge wave of startup acquisitions in recent years has insulated big tech firms from competition. The researchers found that the percentage of venture capital-backed startups that were acquired—rather than going public—skyrocketed from roughly 10% to 90% over the last three decades. ...

Meanwhile, four big players in tech—Meta, Google, Apple, and Amazon—have also seen a decrease in what the researchers call “product market centrality.” This is a measure of how similar their products are to other firms’ products; the lower the score, the closer the company is to having monopoly power.

In other words, the number of small firms that can challenge big tech companies has dwindled—perhaps because most of them have been snapped up. ...

In theory, acquisitions can benefit consumers. In the best-case scenario, bringing a small company under the wing of a larger one enables the product to be deployed at a bigger scale. For instance, the product could be integrated into the big company’s platform and reach more users. Or the acquiring firm’s resources allow the product to be improved in ways that wouldn’t be possible if the startup had remained independent.

On the other extreme are “killer acquisitions,” ... A large company buys a startup and simply lets the product die, eliminating a competitive threat. ... 

were interested in the gray area in the middle. What if big companies weren’t killing off startups outright, but acquiring as many as possible to reduce competition?

To investigate, the researchers obtained data from the National Venture Capital Association on VC-backed start-ups from 1985 to 2019. In the 1980s, roughly 90% of those small firms had gone public, and about 10% had been acquired.

By 2019, “this pattern has entirely reversed,” the team writes; about 90% of startups were acquired. While the number of VC-backed start-ups has grown dramatically over the last few decades, the number of IPOs hasn’t increased much; instead, “the really, really huge growth is in acquisitions,” ..."

From the abstract:

"We document a secular shift from IPOs to acquisitions of venture capital-backed startups and show that this trend is accompanied by an increase in the opportunity cost of going public over the last quarter century. Dominant companies that are disproportionately active in the corporate control market for startups have become more insulated from the pressures of product market competition over the same period. These facts are consistent with the hypothesis that startup acquisitions have contributed to rising oligopoly power."

A Wave of Acquisitions May Have Shielded Big Tech from Competition | Yale Insights The fraction of startups that are acquired instead of going public has skyrocketed over the last few decades, according to a new study co-authored by Florian Ederer at Yale SOM. This acquisition spree may have eliminated many potential competitors of big tech firms, the research suggests.

The Great Startup Sellout and the Rise of Oligopoly (will be published in May 2023)