Fact of the Week: Big Tech Acquisition of Tech Start-Ups Encourages Greater Venture Capital Activity

Source: Tiago Prado and Johannes Bauer, “Big Tech Platform Acquisition of Start-Ups and Venture Capital Funding for Innovation,” Information Economics and Policy 59 (June 2022).

Commentary: A recently published paper by Tiago Prado and Johannes Bauer analyzed 32,367 venture capital deals and 392 tech start-up acquisitions by Big Tech companies between 2010 and 2020. The authors find that Big Tech acquisitions of tech start-ups do not negatively affect venture capital activity in the short run. In fact, the study found a positive, statistically significant increase in venture investments for subindustries that had a Big Tech start-up acquisition. Moreover, the study did not find any negative impact on start-up funding from Big Tech acquisitions in the 10 years of data.

In the three quarters after a Big Tech company acquired a tech start-up, the number of venture capital deals increased 4.74 percent, 7.04 percent, and 6.10 percent, respectively, in the industry segments of the acquired tech start-up globally. In the United States, the total average number of venture capital deals in an industry segment increased 7.86 percent and 8.47 percent, respectively, in the two quarters after a Big Tech acquisition. The study found an even stronger positive effect of Big Tech acquisitions on venture capital deals in Europe—an increase of 31 percent in the second quarter after an acquisition. In other words, these findings suggest that Big Tech acquisitions attract more venture capital to an industry segment, leading to an increase in innovation.

Although Big Tech acquisitions of start-ups encourage venture investments, the authors noted that the impact of Big Tech companies’ acquisition strategies is ambiguous. In other words, their acquisition strategies could potentially foster greater innovation, but it could also eliminate the start-up that becomes “the next big digital platform.” As such, the authors recommend that competition authorities look “for a means other than broad prohibitions on acquisitions that can safeguard competition in the digital ecosystem.”