“Startups and acquisitions are essential elements of America’s innovation ecosystem. Unfortunately, anti-innovation legislation on Capitol Hill would suffocate this ecosystem by depriving startups of the oxygen of American investment while surrendering our innovation edge to China.”
– Doug Kelly, CEO, American Edge Project
On December 15, 2021, a Senate Antitrust Subcommittee will hold a hearing on proposed legislation that would effectively bar certain large American tech companies – those worth $600 billion or more and meeting certain sales criteria – from acquiring or even investing in startups for a decade or more.
If enacted, policies being considered in Washington would seriously damage America’s economic and national security. They would hamstring the ability of startups to raise capital, slow innovation by limiting startup exit strategies, and give Chinese companies a strategic advantage over their American counterparts. Instead of rewriting the nation’s antitrust laws to cripple our most innovative companies, Congress should support the companies that solidified America’s position as a global technology leader while trusting our antitrust system, including enforcers and the courts, to ferret out any genuinely anti-competitive conduct.
Problem #1: Anti-innovation Legislation Will Damage The Startup Ecosystem
Every great American company began as a startup in need of capital and technical expertise. Indeed, most startups expect to be acquired by larger investors. In the United States, 58 percent of startup founders have as their goal getting acquired by a larger company, whereas only 17 percent want to go public via an initial public offering (IPO). Policies, however, that restrict the ability of startups to raise capital for launch, further scale products and services, and then exit with a profit would severely reduce the incentives and ability of entrepreneurs to start and grow the next generation of great American companies.
By hamstringing startups and acquisitions, Congress isn’t just punishing those in Silicon Valley. They could also damage local and regional technology hubs from coast to coast – and everywhere in between.
Innovation is no longer concentrated on the coasts. Instead, it is blossoming in every corner of the country in large- and midsize-communities that are creating their own ecosystems of ideas, talent, and capital (see map below).
While these local efforts are attracting national capital, their ultimate success hinges on a supportive legal and regulatory framework at the federal level. These startups depend on the possibility of acquisition to secure venture capital funding. If you start a business in a place like Minneapolis-St. Paul, Little Rock, or Nashville, you can appeal to investors because a Google or Microsoft might acquire you. If Congress bans such acquisitions, then a startup might not secure necessary financing, and even if does, its value will likely be depressed by taking certain potential acquirers out of the market.
Problem #2: Anti-innovation Legislation Will Slow Breakthrough Innovations And Economic Growth
Moreover, America’s economic history shows that such acquisitions usually spur innovation by allowing companies to improve their products and bring them to market more quickly. If policies stifling innovation had been in effect years ago, many industries – automotive, agriculture, and more – would have suffered, and if concepts thwarting competition creep into other economic sectors (as so often happens with federal legislation), it could cause significant damage across the economy.
In the first place, acquisitions can enhance existing products and offer profitable business models to startups that oftentimes fail to successfully monetize their innovative ideas. For example, in 2009, Pfizer bought Wyeth because it wanted to become a leader in vaccines and biotherapeutics. As a result of the acquisition, Wyeth’s head of vaccine research and development, Kathrin Jansen, joined Pfizer and led its COVID-19 research efforts. She was critical in deciding to partner with German biotech company BioNTech to develop the mRNA vaccine. Would Pfizer have developed its COVID-19 vaccine if it had not acquired Wyeth? Would Wyeth have been able to develop this vaccine on its own?
Similarly, acquisitions allow companies to enter adjacent markets more quickly. General Motors (GM) acquired startup Cruise for $1 billion in cash and incentives in 2016. Cruise is now a critical component of GM’s self-driving automobile strategy, and GM is targeting a fleet of at least one million self-driving vehicles by 2030, which is helping establish it as a top global leader in this field, against China’s efforts.
Finally, acquisitions can help supercharge companies with disruptive products, technologies, and business models. A few examples include eBay’s acquisition of PayPal and Google’s purchase of YouTube, both now billion-dollar companies in their own rights.
Problem #3: Anti-innovation Legislation Will Hand China A Permanent Advantage That Threatens Our National Security
Any antitrust legislation that applies only to the largest, most competitive tech companies in the U.S., and not foreign competitors, will benefit America’s adversaries. The net impact of some proposed policies could allow Chinese companies like Tencent or Alibaba to remain active in the U.S. merger and acquisition (M&A) space acquiring startups that American companies like Apple or Meta would be banned from integrating. This could hand China a permanent geopolitical and technological advantage, threatening our national security.
China’s grand ambition is to become the world’s leading power. To accomplish that, China knows it must erode the U.S.’s technological edge, both by acquiring key technologies and increasing its own capacity for innovation. Since 2015, China has launched a series of bold strategies to overtake the United States, including “Made in China 2025” to upgrade China’s manufacturing, an Internet Plus Plan to transform China’s economy through an all-digital strategy, and a plan to become the world leader in artificial intelligence by 2030. To achieve its aims, China will use any means necessary, including trade, acquisitions, and outright theft – every year, China steals more than $500 billion in intellectual property from the United States.
Rather than tie the hands of our largest tech companies with rules that do not apply to their Chinese counterparts, Congress should encourage even greater investment here at home. This means heavy engagement in research and development (R&D) and preserving the stable legal and regulatory ecosystem that has created America’s current technological edge and spread the benefits of innovation across the nation.