The Big Story: Startups say acquisitions are beneficial, shouldn’t be made harder
As federal policymakers consider changes that would make acquisitions more difficult, Engine released a report this week examining the ways that acquisitions are a critical component of the startup ecosystem, featuring over a dozen startup founders, investors, and accelerators. On Monday, antitrust enforcement agencies closed a comment period on draft merger guidance that would restrict many mergers and acquisitions, especially in the technology sector. 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, reflecting the experiences of founders and evidence about the role acquisitions play in the startup ecosystem.
Startup acquisitions make up the overwhelming majority of successful startup exits, and the founders—and founders turned investors—underscored the many benefits of acquisitions, especially for facilitating virtuous cycles of capital and talent through the ecosystem. Their experiences illuminate research showing that when a startup exits, that capital (and knowledge) shows up as investment in new startups. And acquisitions create many other benefits, including for improving equity, with Preston L. James II, the CEO and Cofounder of DivInc, noting that over time, the dynamism enabled by acquisitions “builds generational wealth and fosters an ecosystem that helps diverse communities to prosper.”
Given the economic benefits and the integral role of acquisitions in the startup ecosystem, Engine urged the agencies to revise their draft merger guidelines in comments this week. As drafted, several of the updated guidelines would restrict acquisitions of startups or take potential acquirers off the table, worsening outcomes for startups and their founders, investors, and employees. The draft guidance also relies on old and controversial case law, including, for example, by citing cases decided before the advent of venture capital and the modern startup ecosystem to support guidelines that ultimately misunderstand how innovation happens. It is imperative that competition policy reflects the needs of the startup ecosystem, and learning from founders is a good place to start as the agencies further hone the guidelines.
Policy Roundup:
Online Safety Bill passes UK Parliament. On Tuesday, sweeping Internet and content moderation legislation passed the UK’s Houses of Parliament, soon ushering a strict new online environment in Britain with several new obligations for startups and large technology companies alike. The legislation, known as the Online Safety Bill, carries several problematic provisions that could lead to widespread age verification, proactive content monitoring requirements, and undermined end-to-end encryption, all of which will make Britain a less desirable market for U.S. startups. The bill will soon become law, after which the British telecom regulator will begin writing regulations to implement the law.
SEC holds Investor Advisory Committee meeting. This week, the Securities and Exchange Commission’s Investor Advisory Committee met to discuss a number of issues impacting startup capital access. In addition to a panel discussion on Rule 506 offerings—a common way startups raise money from investors—the committee discussed the accredited investor definition, with panelists like the Angel Capital Association touching on the impact on the startup ecosystem if the income thresholds are increased. Engine has repeatedly called for the SEC to expand the definition so that more would-be investors qualify, especially from underrepresented backgrounds.
Federal court blocks California age-appropriate design law. A federal judge ruled this week to temporarily block a California law that requires websites and online services to determine users’ ages—which could be expensive and time consuming for startups and raises privacy and data security concerns—or treat all users as children. The law was challenged as unconstitutional in court by a tech industry group, and the judge said this week that the group’s challenge is likely to prevail, noting that the law will effectively force companies to collect additional data from users or block some lawful content and features from all users.
Lawsuit filed to halt disadvantaged business program. This week, Ultima Services Corp, an administrative support services firm, sued the U.S. Small Business Administration (SBA) to block them from extending existing contracts with “socially disadvantaged” business owners. After the U.S. District Court for the Eastern District of Tennessee ruled in July that the agency cannot assume whether or not a small business is “socially or economically disadvantaged based on the owner’s race,” the SBA temporarily paused accepting new applicants for its disadvantaged business program. Engine has long-explained the barriers underrepresented entrepreneurs face within the innovation ecosystem—including access to capital. Programs designed to assist underrepresented founders access the resources they need are critical to the diversity of the startup ecosystem.
Agencies enter into memorandum of understanding on labor issues. This week the Federal Trade Commission and the Department of Labor entered into a memorandum of understanding to strengthen their collaborative efforts regarding a number of issues affecting the startup ecosystem, including non-competes and the classification of workers. Like Engine, this administration has stressed the harmful impacts of restrictive non-compete agreements, including within the startup ecosystem. In contrast, the administration has also pursued efforts to reclassify workers restricting the definition of independent contractors, which could inhibit startup hiring.
