Killers on the Road of Emerging Start-Ups - Implications for Market Entry and Venture Capital Financing
32 Pages Posted: 16 Mar 2023
Abstract
The competitive effects of acquisitions made by large US-based technology companies have come under increased regulatory scrutiny over recent years because their acquisition patterns have been viewed as potentially harming competition. This paper studies the impact of acquisitions by large US-based technology companies on the entry dynamics and venture capital financing in their target product markets. We use data from Crunchbase, a start-up directory listing more than 700,000 start-up companies from 742 product markets globally, distinguishing the US and European markets for 2003–2018. Our difference-in-differences estimation results suggest that the technology giants’ buyouts subsequently reduced market entry rates and decreased the available venture capital funding in the product markets of the acquired companies. The acquisitions of technology giants seem to generate a so-called “kill zone,” which dissuades the market entry of new companies. The kill zone effect is intense and evident in the product markets close to the data giants’ core business areas, where the technology companies have the best prospects of exploiting their existing (consumer) data and competence. We do not find any short-term decline in the market entry or venture capital finance after the data giants’ first acquisitions in unconnected markets. In these markets, though, the data giants seem to build up entry barriers in the longer run through their acquisitions. These findings highlight the negative long-term consequences of the tech giants’ increased market power through their acquisition behavior in relation to firm entry, competition, and innovation in technology-intensive markets.
Keywords: Acquisitions, venture capital funding, competition, technology giants, start-ups, difference-in-difference estimation
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