The Big Story: Policymakers threaten successful startup exits, investment
This week, federal agencies released new draft guidelines for merger enforcement that could reduce the number of acquisitions and negatively impact the ability of startups to successfully exit. The new draft guidelines come amid a parallel effort to revise the filing process for larger transactions, adding costs and new burdens to those acquisitions. Taken together, the agencies’ actions are designed to limit acquisitions, which are critical to investment and successful exits in the startup ecosystem.
The draft guidelines are the latest step by the agencies to remake merger policy and limit acquisitions. The Federal Trade Commission withdrew earlier merger guidance in fall 2021, and launched the effort to rewrite the guidelines in early 2022. Engine weighed in to the earlier inquiry about the guidelines, warning the agencies about the potential for negative impacts on startup investment and startup exits. Startup acquisitions facilitate cycles of capital and talent in the ecosystem that benefits new companies. Research shows that when a startup exits, that capital (and knowledge) shows up as investment in new startups.
Sound merger enforcement is important to ensure startups encounter a fair playing field where they can grow and succeed, but enforcement must be grounded in long-accepted legal and economic reasoning, including evidence about the role acquisitions play in the startup ecosystem. At a related Senate hearing Wednesday, former Antitrust Division head Makan Delrahim testified that the guidelines are unlikely to “have value” if they are viewed as “aspirational” rather than supported “both in the law and accepted economic thinking.” As a result, the new guidelines are likely to generate uncertainty that hinder positive transactions while failing to deliver benefits of sound enforcement.
Policy Roundup:
Senate committee to consider privacy, content moderation bills. The Senate Commerce Committee is slated to markup two pieces of legislation next week that supporters claim will improve kids’ safety but that carry consequences for startup competitiveness. One bill, the Kids’ Online Safety Act, would increase surveillance over children under the age of 17 that use Internet platforms and open up companies to liability if they let young users see harmful content from other users. The other, the Children and Teens’ Online Privacy Protection Act, would update existing law, broadening applicability and liability for websites, requiring additional invasive data collection, increasing costs, and diminishing startup competitiveness. Proposed frameworks for a uniform federal privacy standard include strong protections for children and offer a better path forward for Internet users of all ages and startups alike.
Coalition calls on Congress to authorize, fully fund AI resource for startups. This week, Engine joined 17 civil society and tech advocacy organizations to call upon Congress to fully fund the National AI Research Resource, which could benefit startups by improving talent pipelines, enabling AI research, and directly providing resources for startups. However, Republicans in Congress are reluctant to authorize the funds needed to build the resource, instead floating the possibility of a scaled back pilot program. Engine and several startups weighed in throughout the robust task force process that conceived the National AI Research Resource. It’s critical that the resource is fully built to support innovation.
Small business bills advance impacting loans, diverse entrepreneurship. The Senate Small Business Committee advanced several bills this week, including one to rein in changes pursued by the Biden administration allowing more fintech lenders the ability to participate in issuing government-backed loans to small businesses. The administration’s effort is intended to boost financing options for more diverse entrepreneurs, but it has faced opposition from traditional lenders and congressional leaders, whose bill—the Community Advantage Loan Program Act—would dial back those changes and set guardrails for small business lenders that are not federally regulated. Other initiatives that passed include legislation to support veterans pursuing entrepreneurship and a bill creating an advisory committee to boost diversity amongst Small Business Investment Company participants.
Republicans balk at global tax deal, reinstatement of harmful digital taxes possible. Republicans voiced their fierce opposition to Biden administration efforts to create a global tax framework during a House Ways and Means Committee meeting on Wednesday, alleging that the effort could result in more tax burdens for U.S. companies. However, failure to reach an agreement will likely result in the imposition of digital services taxes (DST) in jurisdictions around the world that largely target U.S. tech companies, the ultimate costs of which are passed on to end customers, including startups. Since its announcement, the framework has faced multiple hurdles, with some countries, like Canada, refusing to put off their planned DST, which is expected to go into effect in January. Startups would benefit from the consistency and certainty the deal would bring, eliminating digital services taxes that increase costs for innovators.
Poorly conceived telecom policy could upend the Internet and increase startup costs. In a new blog this week, we explore a policy framework being debated in Europe that would allow Internet service providers to charge tech companies based on the traffic they generate, threatening to create a multi-tiered Internet and undermine startup competitiveness. Similar proposals have emerged in the U.S., raising the specter of discriminatory fees that stifle innovation and growth of U.S. startups.
Startup Roundup:
#StartupsEverywhere: Wilmington, North Carolina. Jim Roberts has led the transformation of the once tiny startup ecosystem of coastal Wilmington, North Carolina into an environment on par with cities like Charlotte and Raleigh. This has resulted in national attention and the establishment of Wilmington as an emerging hub for entrepreneurs. We spoke with Jim about the importance of community building organizations, his experience leading an angel investor capital network outside of a traditional tech hub, and the impact of a more restricted definition of an accredited investor on startups.
