This week, companies from around the world are virtually participating in the 2021 South by Southwest. Start-up and emerging companies not only want to tell the world about their innovative products, but they want to impress would-be investors who might fund their growth.
But there is a new threat to the start-up ecosystem. Recently Senator Amy Klobuchar (D-MN) introduced a bill that would weaponize antitrust law against big companies, thereby creating tremendous disincentives for large companies to acquire other companies, including pre-revenue start-ups and emerging enterprises. The bill may sound like it helps small businesses at the expense of big companies. However, the unintended consequence is that the bill would make it more difficult for early-stage companies to attract necessary growth capital.
Klobuchar’s bill introduces new, vague legal standards coupled with extraordinarily punitive penalties that will make big tech companies think long and hard before engaging in acquisitions.
In a stark departure from current law that protects the welfare of consumers, the bill would introduce dizzyingly broad concepts of protecting competitors and worse - potential competitors!
Applying antitrust law to the facts of the digital economy is already complicated. Klobuchar’s bill would make antitrust more incomprehensible by outlawing practices that have the potential to harm potential competitors. Despite the unduly nebulous legal standard, and the folly of hunting the specters of potential competitors, the penalties for antitrust violations would be substantial and possibly absurdly onerous. Under the bill, penalties could be as high as 15% of the revenues of the violator or 30% of the competitor targeted by the action.
The combination of ambiguity and outrageous penalties will chill corporate acquisitions. As an unintended consequence, this would make it harder for start-ups to attract growth capital.
Investing in unproven, often pre-revenue, start-ups is a high-risk endeavor. Angel investors and venture capital funds only invest in start-up companies if those investors believe that such a company has the potential to grow and yield the investor a super return on its investment. This return on investment comes when the investor exits the investment by way of an initial public offering (IPO), a sale to a private equity fund, or sale to a large, publicly traded company.
IPOs have become increasingly rare because IPOs and ongoing compliance with federal securities regulations are so costly. Plus, there is no guarantee that an IPO will successfully raise the capital sought by the new public company.
By discouraging, if not outright banning, the acquisition of tech start-ups and emerging companies by large, publicly-traded companies, there will be fewer well-capitalized acquirors looking to buy or invest in growing tech companies. With fewer buyers chasing companies to acquire, the projected valuation of tech start-ups will likely be impaired. Lower valuations would make it much more difficult for companies to attract growth capital even at early angel investor or venture capital rounds. As a result, consumers might suffer if those innovative companies never attract the necessary capital to fully commercialize their products and deliver them to the nationwide market.
For large companies, there would be legal peril in any corporate development strategy, whether through corporate acquisitions or in-house research and development. Under the bill, applying for or enforcing a patent would be considered an “exclusionary” practice. Merely taking advantage of the benefits of federal patent law is viewed as anticompetitive. If this is the case, it is the patent laws, rather than antitrust laws, which should be changed. In the name of promoting innovation, the bill would discourage innovation by treating patent prosecution as a suspect corporate decision.
The focus of antitrust is, and rightly should be, to protect the public, not other companies (who very well may also be targets of antitrust enforcement!). Yet this bill expands the scope of antitrust enforcement from preventing actual harm to consumers to preventing practices that might challenge potential competitors. By expanding the scope of antitrust enforcement, the bill would miss the mark of upholding the welfare of consumers.
The bill seems based on the mistaken notion that big is inherently bad. As we see with the examples of Big Pharma rapidly developing and delivering a lifesaving COVID-19 vaccine, having well capitalized capacity is an important element of rapid innovation and resilience. By going to war with “big” companies, Klobuchar’s bill harms start-ups seeking capital, thwarts R&D and patent prosecution, and impedes companies from raising the capital necessary for resilience. Worse, the bill would slow strategic corporate decision making and innovation to the pace set by Washington regulators.