In No Exit, a recent paper, authors Brian J. Broughman, Matthew T. Wansley, and Samuel N. Weistein, describe how increased antitrust restrictions caused a decline in M&A exits by startups.  However, instead of this leading to an increase in IPOs, companies remained private and used alternatives to access capital and liquidity.

Source: Broughman, Wansley, Weistein

Under the Biden administration antitrust policy changed, with increased enforcement and changes to the merger review policy, among other changes. While these changes applied to all mergers, they had a stronger impact on venture-backed startups because these relate largely to technology companies and also previously experienced low levels of enforcement.  

Source: Broughman, Wansley, Weistein

The authors note IPOs are not a perfect substitute for M&A exits because economies of scale and scope, synergies, regulatory costs, market power, and market cyclicity can lead to IPO valuations being below M&A prices. As a result, in response to these antitrust changes, startups chose not to exit. To raise more capital and liquidity privately, the authors point to two trends that became more significant: employee tender offers and continuation funds. Continuation funds allow VCs to invest in their portfolio companies longer, delaying the need for exits. Two new structures emerged, centaurs and reverse acquihires. Centaurs are private companies that are funded primarily by public cash flow, a prominent example is OpenAI, which raised $13 billion from Microsoft and Anthropic which raised $8 billion from Amazon and $3 billion from Google. Reverse acquihires are when typically a large technology company convinces the founders and key employees of a startup to quit and hires them. It then makes a payment to the startup company shell which is a fee to license the startup’s technology. An example of this is Inflection AI’s employees move to Microsoft in March 2024.

In light of the domino effect of antitrust policies on the capital markets, the authors argue that policymakers should think more broadly about the effects of their actions. Given the growth of the private markets, and developments like continuation funds that extend the life of VC investments, exits will continue to be put off. See the full paper here.