Kill Zones? Effects of Big Tech Start-up Acquisitions on Innovation

This paper investigates short-term effects of big tech start-up acquisitions on innovation empirically. Innovation research has found a strong positive, causal relationship between VC investment and innovation. Using this insight, we can explore the repercussions of big tech start-up acquisitions on innovation by examining their effects on venture capital (VC) activity. We analyze a very large set of observations of more than 32,000 venture capital deals in more than 170 different segments of the tech industry and almost 400 tech start-up acquisitions made worldwide between 2010 and 2020 by Google, Facebook, Amazon, Apple, and Microsoft. Our results suggest a positive, causal impact of big tech start-up acquisitions on venture capital activity, challenging claims about the creation of "kill zones" for start-ups after acquisitions are made by the big techs. For example, after controlling for other factors that may impact VC activity, like initial public offerings (IPOs) and other mergers and acquisitions (M&As), we found an average increase of 30.7% in the total amount of VC funding towards U.S. based start-ups of the same industry segment in the four quarters following a big tech start-up acquisition. For deals targeting European start-ups, we found an increase of 32.1% in the VC funding in in the first quarter after a big tech start-up acquisition. Finally, our findings show that such positive effects, when existent, persist for a few months only, and so do not seem to have lasting impacts on the innovation incentives in the the start-up ecossystem. Our empirical findings should inform current competition policy discussions on imposing restrictions to acquistions of start-ups by the big techs.