In recent research, Brian Broughman, Matthew Wansley, and Samuel Weinstein examine how startups are changing their traditional exit strategies in response to more stringent antitrust enforcement. Many startups are adopting alternative strategies to stay private longer, ultimately raising new questions for competition policy.
In March 2024, the founders of Inflection AI—a startup valued at $4 billion—quit their jobs. They immediately took new jobs at Microsoft, and most of Inflection’s 70 employees followed them. Microsoft paid the shell of Inflection $650 million—$620 million for a license to its AI models and “$30 million for Inflection to agree not to sue over Microsoft’s poaching.” Inflection used the money to pay off the company’s investors, including the venture capital (VC) firm Greylock. In June and August 2024, Amazon and Google completed similar transactions with startups Adept AI and Character AI. While acquisitions in all but name, none of these “reverse acquihires” were reported to the antitrust enforcement agencies.
A year earlier, Microsoft invested $10 billion in OpenAI—a sum that shattered the norms of corporate VC. The companies also deepened their commercial partnership, integrating OpenAI’s models into Microsoft’s products like GitHub. At the same time, Amazon and Google invested billions of dollars in rising startup Anthropic. Again, none of these transactions were reported to the antitrust enforcement agencies despite valuations well above the Hart-Scott-Rodino (HSR) filing threshold. We call these structures “centaurs”—private companies funded primarily by public company cash flows, as opposed to their privately funded “unicorn” counterparts.
Two other trends involving VC-backed startups accelerated in the 2020s. First, as more startups are turning into unicorns, more startup shareholders are selling their shares in secondary transactions. According to an estimate by Industry Ventures, the secondary market quintupled from $12 billion in 2010 to $60 billion in 2021. Secondary sales allow startup founders, their employees, and VCs to cash out without a traditional exit via initial public offering (IPO) or acquisition. Second, VC funds have increasingly been using a structure developed by private equity: the continuation fund. These funds enable VCs to stay invested in their portfolio companies past the end of their fund’s life while also giving investors the option to exit.
What do these simultaneous developments mean? Startups are increasingly deciding to avoid traditional exits for as long as possible. Whereas in the past, most startups went public or were acquired by a public company, now many are remaining private and pursuing new strategies: reverse acquihires, centaurs, secondary markets, and continuation funds. In No Exit, our new article forthcoming in the NYU Law Review, we explain why.
Traditionally, the VC ecosystem worked as follows. A startup would raise a new round of capital every 12 to 24 months. After several rounds, the startup’s founders and employees would want to cash out, and its VCs would need to deliver returns to their investors. The startup would exit the private market. For some startups, the exit was an IPO, for others an acquisition by a larger company, but almost all successful startups exited one way or the other. In the 1980s and 1990s, IPOs were the favored exit option. That trend reversed in the late 1990s and early 2000s. Since the turn of the 21st century, exits by acquisition have far outstripped IPOs.
The boom in startup acquisitions during the early 21st century faced almost no antitrust resistance. The antitrust laws give the government broad authority to sue to block mergers that could substantially lessen competition. While enforcers have long policed mergers and acquisitions among public companies, they generally ignored acquisitions of startups. Among other reasons, startups rarely attain a market share that would raise concern under traditional merger analysis. So, while acquirers had to notify antitrust enforcers about startup acquisitions over certain dollar value thresholds, the enforcers rarely sued to block these deals. When Facebook bought Instagram and Google bought DoubleClick, enforcers didn’t mount a challenge.
Beginning at the end of the first Trump administration, that began to change. Enforcers started taking a much closer look at startup deals. And the era of permissive merger review ended under President Joe Biden. He appointed Lina Khan to chair the Federal Trade Commission(FTC) and Jonathan Kanter to lead the Antitrust Division of the Department of Justice (DOJ). Khan and Kanter stepped up enforcement, challenging more deals and settling fewer cases with consent decrees. They also made changes to the merger review process that increased the burden on merging parties, making it lengthier, more expensive, and less certain.
Khan and Kanter believed—arguably with good reason—that incumbent tech companies were buying startups to choke off nascent competition. So they started to challenge these deals. Between 2012 and 2019, enforcers challenged only three startup acquisitions. Between 2020 and 2023, they challenged 14. Lawsuits or the credible threat of lawsuits killed deals between Adobe and Figma (design software), Sanofi and Maze (pharmaceuticals), Qualcomm and Autotalks (automotive), and Google and Wiz (cybersecurity), although the latter deal survived antitrust review in the second Trump administration. For the first time in a long time, under the Biden administration a significant merger investigation was more likely to end in a lawsuit or an abandonment than a negotiated settlement. The chilling effect spread across Silicon Valley, putting would-be acquirers, founders, and VCs on notice that acquisitions by large incumbents were risky.
So how did startups respond? One might expect that they would substitute one kind of exit for another—that blocking acquisitions would lead to more IPOs. But while IPOs and acquisitions both provide liquidity, they are not perfect substitutes. The price that a startup commands in an acquisition may exceed the valuation it can achieve in an IPO because of synergies, economies of scale and scope, or the premium incumbents are willing to pay to eliminate potential competitors. The IPO market is also highly cyclical, so going public at the wrong time could be costly. 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.
Instead of choosing a different exit, many startups are choosing no exit. Rather than go public or be formally acquired by a public company, startups and their would-be acquirers have developed new strategies to achieve their goals. This brings us back to the trends we started with. Reverse acquihires, centaurs, secondary markets, and continuation funds are all ways for startups to avoid traditional exits while still allowing founders and VCs to recoup their investments.
What do these developments mean for antitrust enforcement and competition policy? We contend that antitrust enforcers should consider the hydraulic effects of their actions. Restricting exits affects how startups perceive their options. Making acquisitions riskier will push some startups to exit via IPO. Making IPOs more costly will push some startups to exit via acquisition. Simultaneously discouraging both acquisitions and IPOs will result in some startups choosing a third path: staying private longer, evading the antitrust laws, and creating new structures that might harm competition and diminish transparency. And if these distortions reduce venture returns relative to traditional exits, they might increase the cost of capital for the next generation of startups. The social benefits of enhanced antitrust enforcement can make these tradeoffs worthwhile, but we argue that there are real costs to narrowing the merger aperture, which enforcers ought to consider.
At the same time, we think that in some circumstances, enforcers need to be more aggressive. They should prevent acquirers from making an end run around the antitrust laws. A reverse acquihire, which hoards resources from competitors while avoiding antitrust scrutiny, can harm competition just as much as a formal acquisition. And it’s possible that the centaur structure or other large corporate venture capital investments will be used to neuter competition. We believe that antitrust enforcers shouldn’t let companies circumvent merger enforcement by structuring their transactions to avoid HSR filing requirements. HSR Rule 801.90 provides that the economic substance of a deal, rather than its form, triggers the requirement for merging parties to file with the government. The agencies can and should seek significant fines for these types of HSR violations.
It remains too early to tell how the antitrust crackdown—if it persists during the second Trump administration—will ultimately shape the availability of startup finance. Although heightened scrutiny of acquisitions may increase the cost of capital, we are not as worried as some other scholars are about capital formation. Venture deal activity and fundraising have declined in the last two years but are still at historically high levels. The emergence of employee tender offers and continuation funds shows that startups and VCs are finding new ways to access capital and liquidity. Private ordering is resilient.
We are worried, however, about transparency. In the old venture capital cycle, by the time a startup’s technology began to significantly impact society, it would have been exposed to the scrutiny of the public markets—disclosures, short sellers, and securities litigators—either by going public or being acquired by a public company. If the startups that would have been acquired evolve into centaurs or are gutted in reverse acquihires, antitrust isn’t achieving its goals. And if socially important businesses fade into the shadows, that’s bad for all of us.
Author Disclosure: The authors report no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
Subscribe here for ProMarket’s weekly newsletter, Special Interest, to stay up to date on ProMarket’s coverage of the political economy and other content from the Stigler Center.
