Fast-growing startups in search of capital and liquidity have traditionally sought to
exit the private capital market through M&A or IPO. Until recently, antitrust enforcers
rarely challenged startup acquisitions. But under the Biden administration, enforcers
worried about the growing dominance of Big Tech sued to block more startup deals.
Since antitrust restricts M&A but not IPOs, one might expect that greater antitrust
enforcement would cause startups to substitute one kind of exit for another, leading
to more IPOs. That did not happen. While M&A and IPOs both provide liquidity,
they are not perfect substitutes. We model heterogeneity in M&A and IPO pricing
to explore how increased antitrust enforcement impacts venture capital. Economies
of scale and scope, synergies, regulatory costs, market power, and market cyclicality
can cause IPO valuations to fall significantly below M&A prices. And heightened
antitrust scrutiny can reduce the value of an IPO by undermining one of its main
advantages: access to publicly traded equity that can be used as currency for future
acquisitions.
In this Article, we show how startups have responded to the antitrust crackdown not
by choosing a different exit but by choosing no exit. Startups are easing liquidity
pressure by letting employees cash out their shares in tender offers. Venture capitalists
are extending their exit horizons by forming continuation funds. Would-be acquirers
have developed new structures to evade antitrust law, such as the centaur—a private
company funded by public company cash flows—and the reverse acquihire—a mass
employee exodus from a startup to a public tech company, coupled with a cloaked
payoff to the startup’s investors. We explain the implications of these changes for
competition policy, capital formation, and the continuing erosion of transparency
into socially important businesses.
