New Report: International Outcomes of Venture-funded Companies: The Role of Acquisitions

Our director Juan Delgado has co-authored the report International Outcomes of Venture-funded Companies: The Role of Acquisitions, funded by Adigital, in collaboration with  Shawn Blosser and Susan Woodward. The report lays on data both from the US and Europe on counts and values for IPOs, acquisitions, and failures (companies that are worthless at exit) for Venture Capital (VC) startups. The data includes a total of 10,867 exits for US and 4,786 exits for Europe, throughout August 2002 – March 2020.

Startup acquisitions have become a central topic in the antitrust/competition policy debate. Critics of startup acquisitions argue that large companies acquire startups to eliminate potential competitors, or even to put them out of business. They also argue that the threat these “killer acquisitions” discourages investment in startups and hobbles innovation. Proposals to harden merger review policies start from the unfounded premise that if acquisitions are inhibited, more startups would become large, independent, public companies. The data shows this is wrong. Only a small percentage of startups go public (less than 5 percent in the US and 8 percent in Europe), making acquisitions essential to the startup industry (60 percent of VC startups in the US and 58 percent in Europe are acquired). Acquisitions provide a valuable exit path for startups that are not able to go public or that are struggling to succeed on their own. Inhibiting startup acquisitions could lead to more startup failures, discourage investment in startups, and reduce innovation and competition.

The report concludes that, contrary to popular impressions, an IPO is a rare exit for a venture-funded startups. Data shows the essential role of acquisitions in venture capital investing. The exit pattern differs across industries (tech vs biotech), but still acquisitions constitute the predominant exit strategy.  The exit pattern is similar in the US and Europe: Going public is seldom an alternative to tech acquisitions.

These conclusions have relevant competition takeaways:

• VC-funded companies’ diverse outcomes call for a case-by-case regulatory review of acquisitions.
• Tech IPOs are seldom an alternative to tech acquisitions.
• Startup failures are bad for everyone, not just investors and founders.
• Stricter merger review standards could deter market entry, competition and innovation.
• Inhibiting startup acquisitions does not necessarily promote competition, innovation or efficiency.
• The venture outcome data does not speak to the issue of which mergers should be approved and which blocked. It does show that acquisitions are very important to venture innovation, and that changes to M&A policy could have consequences that are socially worse rather than better.

The full report is available on Adigital website here, as well as the Main Take Aways.

Adigital is the Spanish Association for the Digital Economy, an action-tank that promotes the development, in Spain and in Europe, of a sustainable, inclusive and reliable digitalisation that contributes to the country’s productivity and competitiveness. Adigital received funding from Meta Platforms Inc. to support this research.

The views expressed in this paper are the sole responsibility of the authors and cannot be attributed to Games Economics, Adigital or any other parties.