Aug 17, 2022 - Technology

On acquisitions, Beltway and tech talk past each other

Illustration of the scales of justice with one side full of a pile of cursors and one side with the Capitol Dome.

Illustration: Aïda Amer/Axios

Meta's plan to acquire a small virtual-reality firm — and the Federal Trade Commission's lawsuit to stop the deal — has become a Rorschach test for influential figures in both D.C. and Silicon Valley.

The big picture: Washington regulators see a monopoly move, but for much of the industry, it's just everyday capitalism at work.

D.C. and Silicon Valley appear to be speaking different languages when it comes to the role of acquisitions in tech innovation.

  • The FTC argues Meta's purchase of Within Unlimited, a virtual reality fitness company, is "illegal" because the social networking giant is "already a key player at each level of the virtual reality sector."
  • But many tech insiders view deals like this as a sign that the startup game is working as intended.

How it works: Most startups have always had two ways to fund growth and pay off their investors: stay independent and try to go public, or sell to another company. (Another doorway leads to bankruptcy, and many startups end up taking it.)

Initial public offerings (IPOs), a grail for many founders and investors because they can provide rich returns, have always been relatively rare. Companies have to win over investment bankers, comply with securities rules, and persuade the public that they have big growth potential.

  • Tech IPOs today typically involve companies with at least $100 million in annual revenue. That's much higher than in the 1990s, when Amazon went public with $16 million in revenue the prior year.

Acquisitions are simpler, faster and much more common than IPOs.

  • The rise of tech's giants over the past 20 years have made "invest, grow, sell to Google/Facebook/anyone" a sensible strategy for a multitude of startups.

FTC chair Lina Khan and other regulators today aim to shift this balance, hoping to give more startups a shot at becoming independent giants themselves.

Yes, but: Plenty of startup founders and investors are not cheering this effort.

  • Smaller tech companies have sometimes supported antitrust action when it's aimed at reining in the power of the biggest tech companies or ending what critics view as Big Tech's practice of promoting their own services over rivals. But arguments for government intervention vary.
  • But regulatory moves that look like they might discourage or slow acquisition deals draw fire from the venture-capital industry — the chief source of funding for most of the tech startup world. Bills aimed at limiting such activity have stalled in both the House and Senate.

A lot of venture capitalists and startup founders — with some notable exceptions — think the current ecosystem works well.

  • "So many companies that get acquired are great companies, but they're not super viable, they're not going to grow to a billion dollar company. So it's better to be acquired, and get money back to the investors," said Kyle Stanford, an analyst with PitchBook, in an interview with Axios last month.

The other side: Roger McNamee, a venture capitalist and early investor in Facebook who's been working as an activist for tech industry reform, told Axios the FTC's suit against Meta is "a necessary first step and antitrust is actually an entrepreneur's best friend."

  • "How do you inspire the next generation of entrepreneurs if your status quo is big tech runs everything?" Andy Yen, CEO of Proton, an encrypted email company, told Axios in an interview earlier this summer. "The issue is, it's not the model VCs know."
  • Any great company worth investing in has lots of different exit options, Spencer Greene, a VC at venture firm TSVC, told Axios. "If you cut off one of the options among the many, then you make it marginally less attractive. But in exchange for that, if it also encourages competition, then on balance it may actually be good for innovation and for investment."

Between the lines: The FTC makes the case that blocking Big Tech's giants from making acquisitions won't put a deep freeze on the startup business.

  • "FTC leadership accepts the idea that exit opportunities play a crucial role" for startups seeking funding, Bill Kovacic, former FTC commissioner, told Axios. "What they violently disagree with is the idea that cutting off exit paths that involve Meta, Amazon, Google and Apple will forestall the exit paths that matter the most."
  • In the FTC's view, Kovacic says, the road most startups take has "a lot more than those four" exit ramps.
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