May 21, 2021 - Economy & Business

DC vs. VC

Illustration: Sarah Grillo/Axios
Illustration: Sarah Grillo/Axios

Venture capitalists are used to being praised by elected officials, who view early-stage investment as a job creation engine. But a bipartisan schism is emerging over the VC model itself, and its reliance on acquisitions.

Driving the news: Two senators who don't agree on very much, Amy Klobuchar (D-Minn.) and Josh Hawley (R-Mo.), each have proposed antitrust bills that would make it more difficult for large companies to make acquisitions.

  • Jeff Farrah, general council for the National Venture Capital Association, penned his group's opposition to both bills in TechCrunch earlier this week, warning of unintended consequences.
  • Sources close to both senators tell me that Farrah is wrong about the "unintended" part.

Hawley's proposal is a bright-line ban on all acquisitions by companies with at least $100 billion in market cap.

  • Farrah points out that this would stop not just Facebook and Amazon, but also non-tech companies like John Deere, Starbucks and Thermo Fisher Scientific. But Hawley, I'm told, is absolutely fine with that. Yes, he focuses most of his public fire on Big Tech, but he has similar concerns about monopolistic activity in other sectors.

Klobuchar's bill is more nuanced and, given the politics of the moment, much more likely to become law. It basically would flip the burden of proof from the U.S. government to the companies, in many situations where the acquirer has a market cap of at least $100 billion. In other words, such deals would be de facto blocked until they aren't.

  • NVCA's Farrah argues that this bill, while more lenient than Hawley's, creates burdensome uncertainties for startups and their investors. Klobuchar was on a plane an unavailable for comment last night, but the sense I get is that her response would boil down to: This is better for startups than you think.

In both cases, venture capitalists are arguing that restricting mergers will restrict entrepreneurship, because so many startups are formed with the expectation of someday getting acquired. Sure, most would prefer to become giant successes that can go public, but even the most idealistic founder knows the odds.

  • Farrah acknowledged to me that some VC portfolio companies are competitively harmed by big businesses, and isn't taking a position on other antitrust proposals that could include breaking up certain companies or restricting their market activities. His group's opposition is specific to acquisitions.

In both cases, the political response is that the "build it to sell it" model is good for venture capitalists and founders, but not necessarily for the U.S. economy at large. Particularly if it further strengthens giant incumbents.

  • As one Capitol Hill source puts it: "If the big company really wants the technology, they could license it or try to develop it themselves."

The bottom line: Most VC-backed acquisitions would be untouched by either bill, because most startups are acquired by companies with market caps south of $100 billion. But such acquisition limits could certainly put downward pressure on all acquisition pricing, because there isn't an 800-pound gorilla lurking, and create new tensions between two groups of American power brokers that used to be the best of friends.

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