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The Great Startup Sellout and the Rise of Oligopoly

 |  March 6, 2023

By:Florian Ederer & Bruno Pellegrino (CLS Blue Sky Blog)

Incumbent acquisitions have increased lately, as they allow larger companies to acquire new assets, from technology to talented employees and advisors. Startups, on their part, gain wider access to resources, a wider customer base, and decidedly more stability. This was the case with the notable acquisition of Whatsapp by internet giant Facebook in 2014, which came in at a headline-stealing $19 billion, despite Whatsapp’s relatively small size (at only 55 employees) and revenue. However, its immense rise in popularity at over 450 million users made Facebook see the growth potential in the company, deciding to acquire it in order to boost their own messaging service, Facebook Messenger.

Likewise, we can look at Amazon’s purchase of Twitch for $970 million, also in 2014. The live-streaming platform used most prominently by video game streamers was an example of a large and highly committed user base, which Amazon could use to expand its own video streaming offering. The platform has continued to grow since Amazon snapped it up, becoming a major name in the video game industry with over 30 million active users per month and an entire streaming industry developing around it.

These and other examples have been the subject of scrutiny and debate for some time now. Some commentators argue that these purchases help entrench dominant firms, or even kill innovation. Instead of allowing for new synergies, these “killer acquisitions”, as they are sometimes called, may protect incumbent firms by preventing newcomers from fully challenging their existing business models.

In this article, authors Florian Ederer and Bruno Pellegrino present their new paper, where they shed new light on this debate by documenting the way venture capital exit strategies have changed, going from IPOs to acquisitions by incumbents. They also show show evidence of how this might have affected competition in the United States…