The Great Startup Sellout and the Rise of Oligopoly

Startup acquisitions by incumbent firms have been on the rise for the last few years. These acquisitions often allow larger companies to acquire new technologies or talent, while startups gain access to resources and a wider customer base. One notable example is the acquisition of WhatsApp by Facebook in 2014 for a reported $19 billion. WhatsApp was a relatively small startup at the time, with only 55 employees, but had gained immense popularity as a messaging app with over 450 million active users. Facebook saw the potential for growth in messaging and decided to acquire WhatsApp to expand its own messaging capabilities.

Another example is the acquisition of Twitch by Amazon in 2014 for $970 million. Twitch was a live-streaming platform focused on video game content and had gained a large and passionate user base. Amazon acquired Twitch to expand its own video streaming capabilities. Since the acquisition, Twitch has continued to grow and has become a major player in the gaming industry, with over 30 million active users per month.

These and other numerous examples have been the subject of much policy scrutiny and academic debate, with some critics arguing that they help entrench dominant incumbent firms and in some cases even kill off innovation (Cunningham et al. 2021). Rather than allowing for the creation of synergies, acquisitions may protect the dominant position of incumbent firms by limiting the ability of acquired startups to challenge their business models.

In a new paper, we shed new light on this debate by documenting how venture capital exits have shifted from IPOs to acquisitions by incumbents and show evidence of how this might have affected competition in the United States.

We first show that initial public offerings (IPOs) as a means of VC exits have become significantly rarer, while acquisitions have become more common. During the late 1980s and early 1990s, there were about nine IPOs for every one acquisition. In 2019, however, there were over 900 acquisitions and only approximately 100 IPOs.

This change does not appear associated with any decrease in the number of startups. In fact, the number of startups backed by venture capital, which is most of the ones that eventually go public, has notably increased IPOs are declining because most VC-backed startups now prefer to be acquired by established firms.

This complete reversal raises the question of whether the quality of VC-backed startups has changed. We show that the average entrant productivity premium rose from around 5 percent in 1997 to over 9 percent in 2019. This development suggests that over this time period the opportunity costs of entering and competing with incumbents have increased significantly for typical startups.

As mentioned above technology companies have made a disproportionately large number of startup acquisitions. The largest tech companies, Google/Alphabet, Apple, Facebook/Meta, Amazon, and Microsoft (collectively known as GAFAM), have acquired hundreds of companies in the past two decades, with a particularly sharp increase in activity over the last 10 years. This has led to concerns from congressional and academic critics of past antitrust policies, as many of these acquisitions were conducted without pre-closing antitrust review (so called “stealth acquisitions”) or antitrust challenge. Critics argue that acquisitions by GAFAM are competitively harmful, as they eliminate future competition and deter new entrants in GAFAM-dominated markets.

We then investigate whether the competitive pressures that GAFAM are facing in the product market are changing. A comprehensive measure of product market competition is usually difficult to obtain, especially when industry boundaries are relatively fluid. One such measure is the product market centrality χi developed by Pellegrino (2019). χi captures the topology of the product market rivalry network and firm i’s ability to influence in a single score ranging from 0 to 1. When χi is close to 1, firm i is central and has many rivals that supply products similar to its own. As a result, it cannot affect prices. In contrast, if χi is close to 0, the firm is at the periphery of the product market rivalry network and can behave like a monopolist. A lower product market centrality χi effectively insulates the firm from the competitive pressures of the product market.

We show that all the GAFAM companies have an exceptionally low product-market centrality χi, placing them in the bottom two percentiles of the distribution of χi among technology firms in 2019. This suggests that these companies supply products with unique characteristics that provide them with tremendous insulation from competitive pressures. Moreover, the product-market centrality of GAFAM declined significantly while their respective profitability increased. The only exception is Microsoft, which saw its product-market centrality marginally rise from the lowest percentile to the second-lowest percentile.

The results of our paper suggest that startup acquisitions have contributed to rising product market power of large incumbent acquirers. However, more research is needed to establish a causal relationship.


Cunningham, Colleen, Florian Ederer, and Song Ma, “Killer acquisitions,” Journal of Political Economy, 2021, 129 (3), 649–702.

Pellegrino, Bruno, “Product Differentiation and Oligopoly: A Network Approach,” WRDS Research Paper, 2019.

This post comes to us from professors Florian Ederer at Yale School of Management and Bruno Pellegrino at the University of Maryland’s Robert H. Smith School of Business. It is based on their recent paper, “The Great Startup Sellout and the Rise of Oligopoly,” available here.

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