Who could possibly be on the side of the regulators? Don’t they make life harder for our ambitious startups?
Having sat alongside many of the country’s most successful entrepreneurs, I have a lot of sympathy with this view. I have seen first-hand how many founders’ radical plans often suffocate under layers of needless regulations.
And when you’re an innovator, it can feel like our laws move at the pace of treacle. Regulations are always a decade or so behind the curve.
But while that’s true, we also need to be careful of swallowing vague generalities hook, line, and sinker: just because we’re on the side of business and enterprise, doesn’t mean business and enterprise is always right.
And I think we’re now at risk of sleepwalking into this mistake when it comes to the Competition and Markets Authority (CMA), which has faced a tidal wave of criticism from the business community over recent months.
The Activision-Microsoft deal
First, game developer Activision Blizzard said that the UK was “closed for business” when the CMA blocked its acquisition by Microsoft. And now British entrepreneur Sir Jim Ratcliffe has said that the CMA is “hostile to business”.
It seems like the startup ecosystem has lapped this claim up: this is another example of the regulators getting in the way of the market, or so the argument goes. But, once you get under the surface, the picture is much murkier.
One of the CMA’s primary roles is to make sure that giant incumbent firms are not abusing their market power to squeeze smaller startups.
This is not just an academic problem – it’s something that the UK truly needs to tackle: a survey by startup think-tank Coadec found that 80% of UK tech investors were concerned about established players using their market position to make life more difficult for startups.
And one of the most powerful tools that the CMA has in its arsenal is to block acquisitions that risk giving incumbents too much power.
On one hand, acquisitions can help incumbents get a vice-like grip on a sector. And the tighter the grip, the more difficult they can make it for new entrants.
They can reduce their prices to destroy competition. They can leverage deep relationships with suppliers to make life difficult for emerging startups. And they can block off competitors’ access to essential data, ecosystems, and platforms.
The usual response is that the regulator should focus its enforcement activity on this illegal activity rather than blocking deals in the first place.
But these anti-competitive behaviours often exhibit themselves in subtle and difficult-to-detect ways: for example, if an incumbent has huge buying power, suppliers might think twice about also supplying an emerging startup challenger. Nothing needs to be overtly said for market behaviour to be warped.
So, sometimes, the only way to prevent such market manipulation is to block the acquisition in the first place.
The scaling problem
On the other hand, unchecked acquisitions can give incumbents free rein to buy up disruptive startups before they reach the scale to challenge their core businesses.
At its most obvious, a tech giant might acquire a startup to kill it off. In other cases, a startup might continue to exist but be lightly guided away from doing anything that may undermine the new owner’s core business.
In fact, this is a problem that the UK seems to suffer from in a particularly acute way. One perennial discussion topic that you hear around Silicon Roundabout is how many of our startups fail to make the jump from small business to unicorn status.
There are undoubtedly many complicated reasons for this problem, but it’s worth investigating whether aggressive buy-out activity could be playing a role. According to research from Beauhurst, 781 high-growth companies exited in 2021. Only 49 exited through IPO, with the other 732 bought by corporate acquirers. These numbers are suggestive, and this issue is worthy of further investigation.
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Pros and cons
Now don’t get me wrong, I’m not arguing that acquisitions are bad. In fact, the opposite is the case: they give investors and founders liquidity to reinvest in our entrepreneurial ecosystem and provide startups with the capital they need to expand faster.
And I am certainly not arguing that the CMA is perfect: they don’t get every decision right and they always seem to take an absolute age to come to a decision, keeping companies in a state of zombie-like limbo.
But we need to be inherently sceptical when we see big businesses slamming the CMA – and, instead, read their words through the lens of corporate vested interest.
When they say Britain is closed for ‘business’, they might actually just mean that Britain is closed to corporate megaliths, like themselves, who want to abuse their market position.
If that’s the case, then it’s a good thing. And the startup community needs to support it.
Jordan Greenaway is founder of thought leadership PR agency Profile
Has CMA overplayed its hand in blocking Microsoft’s Activision takeover?