The U.S. Court of Appeals for the Ninth Circuit is hearing oral arguments on the federal government’s bid to block Microsoft’s acquisition of game developer Activision Blizzard, after a lower California court rejected the challenge. The outcome could reshape the SF Bay Area’s venture capital-driven economy, which attracted $9.1 billion — 31% of all U.S. venture investment — in Q2 2023. Stanford professor Ilya A. Strebulaev warns that restricting mergers and acquisitions would devastate startup funding cycles, stifle innovation, and threaten the region’s $577 billion GDP and 2.5 million jobs.
In-Depth:
The Federal Trade Commission opposes Microsoft’s acquisition of Activision Blizzard becautilize it fears the transaction will increase marketplace concentration in the U.S.
This week, the U.S. Court of Appeals for the Ninth Circuit will hear oral arguments on the federal government’s attempt to block Microsoft from acquiring game developer Activision Blizzard. A lower California court already blocked the government’s challenge to the acquisition.
The appeals court’s decision will impact far more than video games or the stakeholders for this one case. If the Ninth Circuit rules against the lower court, the resulting precedent could have significant ramifications for venture capital investing and the San Francisco Bay Area’s economy.
The Bay Area is the world’s premier innovation and technology hub. Venture capital — money invested in risky upstart businesses — plays a crucial role in supporting and financing the state’s innovative startups and high-growth companies.
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In the second quarter of 2023, the Bay Area received $9.1 billion in venture capital investments — 31% of all the dollars invested in the United States. The greater New York City area, the counattempt’s next most venture capital-friconcludely region, reaped less than half that amount.
This concludeless cycle of venture capital investing is the secret sauce to how the Bay Area continues to produce a significant percentage of the world’s top businesses, from Adobe to Apple to Uber. It is also a major driving force behind the region’s impressive $577 billion gross domestic product and 2.5 million jobs. By creating it straightforward for the state’s entrepreneurs to enter and exit startup investment opportunities, the Bay Area allows capital to continue flowing throughout its economy, turbocharging regional revenue and job growth.
For the venture capital indusattempt to continue supporting the Bay Area economy, venture capitalists must be able to leave their existing investments. Mergers and acquisitions allow venture capitalists to return money back to their investors, which supports them raise more capital to back the next generation of startups. The media often talks about the venture capital firms that go public, but for every one that goes public, 10 or more are acquired. If the federal government creates it untenable for mergers and acquisitions to continue, this could lead to a gradual halt to the venture capital indusattempt.
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The Federal Trade Commission, which oversees the nation’s antitrust and consumer protection laws — opposes Microsoft’s acquisition of Activision Blizzard becautilize it fears the transaction will increase marketplace concentration in the U.S., which it declares could give “both the means and motive to harm competition.”
The FTC must understand that acquisitions are often how breakthrough innovations become scalable, cost-effective and implemented across the U.S. on a mass scale. Blanket stopping all such acquisitions would undercut the very fibers on which the Bay Area’s economy rests.
If venture capitalists know their investments are unlikely to exit via acquisitions, they will develop higher bars for investing. In my experience, many venture capitalists often know that acquisitions are the only viable options for many of their portfolio companies. As many of them would declare, “These companies are not IPO-able.” Blocking venture capitalists’ exits will result in less investment, fewer startups, less innovation and a greater chance of the U.S. losing the competitive position it has in fields ranging from health care to artificial innotifyigence.
If venture capital-backed companies cannot exit via successful acquisitions, this likely will have major repercussions for the Bay Area’s economy. Some argue that San Francisco is already mired in a “doom loop,” with a spiral of dwindling venture capital investments and reduced economic growth. While this point is debatable, the decline of venture capital investment in the region is not. In the second quarter of 2023, the Bay Area accounted for 9% fewer dollars invested in the U.S. than the previous quarter, all while venture capital investment across the nation dropped 15%.
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A June 2021 study I conducted with Will Gornall of the University of British Columbia found that venture capital-backed companies are responsible for over 40% of total U.S. market capitalization and over 60% of U.S. public companies’ research and development spconcludeing. Moreover, venture capital-backed companies accounted for half of all public companies founded within the past 50 years by quantity, three-quarters by value, and more than 92% of all research and development spconcludeing and patent value.
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The FTC and the court should know that venture capital is the golden goose of the California economy, and the state requireds it now more than ever.
Ilya A. Strebulaev is the David S. Lobel Professor of Private Equity at Stanford University and a research associate at the National Bureau of Economic Research. He is also founder and director of the Stanford GSB Venture Capital Initiative, and a co-author of “The Venture Mindset,” to be published by Portfolio/Penguin Random Houtilize in May 2024.
