The Importance of Exit via Acquisition to Venture Capital, Entrepreneurship, and Innovation

Abstract

Antitrust regulators around the world, including in the UK, have proposed changes to merger review policies that impact how acquisitions of start-ups would be investigated and evaluated. Such changes will likely lead to heightened scrutiny—and increased costs and longer reviews—for many acquisitions, including both horizontal and non-horizontal mergers. In evaluating the merits of such changes, it is critical to take into account the important role that exit via acquisition plays in providing incentives for venture capital (VC) investment and entrepreneurship. This article seeks to provide context for evaluating the effects of such proposed changes. First, it documents the links among VC, entrepreneurship, and innovation, and how exit via acquisition can foster dynamic innovation, one of the stated goals of the CMA. Second, it identifies additional consumer benefits derived from acquisitions of small companies by larger companies. Third, it describes VC investment in the UK, including the favourable, yet fragile, position that the UK holds as a VC hub for continental Europe. Finally, it documents the recent increased diversity in VC investment and entrepreneurship in the UK, which could be curbed by the proposed changes.

Keywords: mergers, antitrust, entrepreneurship, venture capital

JEL Classification: K21, K22, M13, L13, L4, L40, G24