Scaling versus Selling Startups: The Role of Foreign Acquirers in Entrepreneurial Ecosystems

Abstract

This paper analyzes the decision of growing startups to either scale up on their own or to sell to an established company. The model recognizes the intergenerational linkages that acquirers were startups themselves in the past who chose not to get acquired. The acquisition price depends on the demand from those established acquirers, as well as the willingness of startups to sell instead of scale themselves. The model shows that in a closed economy, the number of scaleups is efficient. In an open economy, foreign buyers increase demand and raise acquisition prices. This stimulates startup formation but also encourages too many growing startups to sell instead of scale. In a dynamic equilibrium without externalities, foreign acquirers are a net benefit to the domestic ecosystem. However, two model extensions identify conditions under which they can weaken it, namely (i) when there are intergenerational externalities in the accumulation of scaleup experience, and (ii) when there is significant brain drain of serial entrepreneurs.

Keywords: Startups, scaleup, acquisitions, serial entrepreneurs, brain drain

JEL Classification: L26, M13