GAFAM start-up buyers, predators or innovation accelerators?

Since 2001, Google/Alphabet has acquired 250 start-ups. Apple 123 since 1988. Facebook/Meta 95 since 2005. Amazon 113 since 1998. Microsoft 273 since 1987. Are these acquisitions by GAFAM a threat or an opportunity for innovation? The answer can influence the legislator’s behavior.

In 2021, in the United States, President Joe Biden appointed Lina Khan to lead the Federal Trade Commission whose mission is to protect the consumer, prohibiting the creation of a monopolistic position by large companies. This appointment came as a shock to the high-tech industry and more particularly to GAFAM.

Read more: GAFAM: how to limit “killer takeovers” of start-ups?

In fact, this Columbia University law professor made herself known in 2017 by an article in the journal Yale Law Magazine in which she believes antitrust laws are inadequate to regulate platforms like Amazon or Google. It states that the acquisition of start-ups by GAFAM constitutes a form of predation of innovation by these companies that intend to avoid the emergence of competitors and establish monopolistic positions. Due to the very modest size of the start-ups, these acquisitions are not subject to the FTC’s caudina forks. Since her appointment, Lina Khan has led a legal and media crusade against GAFAM to prevent them from acquiring these start-ups in the name of the general interest, fighting monopolies and promoting innovation.

Start-ups, initiators of innovation

However, industrial history is paved with companies (DEC, IBM, Xerox, ATT, Kodak, Hewlett-Packard, Alcatel, etc.) that have experienced great difficulties or disappeared despite massive investments in research and development. The lesson of the XXand century is that these R&D investments rarely allow large companies to generate radical innovations that bring growth. Radical innovation is often initiated by start-ups outside the boundaries of large companies.

As we showed in a 2009 research article, in the new paradigm ofopen innovation appearing on the 21stand In the 20th century, large companies participate in innovation ecosystems to find growth levers through the acquisition of start-ups. In this innovation management model, they outsource the research and exploitation of innovation and focus on the development and exploitation of acquired innovations. It is in this paradigm that the acquisition and development (A&D) strategies of large groups such as GAFAM should be placed.

These acquisitions of start-ups, far from swallowing innovation, contribute to financing their growth to become “scale-ups”, the name given to successful start-ups. Would YouTube, created in 2005, have become the most popular platform for watching videos had it not been acquired in 2006 by Google and thus benefiting from Google’s financial, technological and commercial capabilities? Would Android, created in 2003, be the operating system that powers over 70% of the world’s smartphones today if the start-up hadn’t been acquired by Google in 2005? The same question arises in relation to WhatApp, Oculus and Instagram which were acquired by Facebook, LinkedIn acquired by Microsoft or Audible and Zappos acquired by Amazon.

Virtuous dynamics in the ecosystem ofopen innovation

This generalization of A&D strategies modified the behavior of several actors in the ecosystems ofopen innovation and started a virtuous dynamic. Entrepreneurs, students and universities create or encourage the creation of start-ups knowing that they can be acquired by a large company and thus reward entrepreneurial initiative.

We showed in our research that the prospect of selling start-ups to large groups was also a very strong incentive for venture capitalists to invest. The latter are the essential “transmitters” of innovation between its exploration phase carried out by the start-up and the exploration phase carried out by the large company. Most capital outflows by venture capitalists occur through the sale of their holdings to large groups; The IPO remains the exception. In 2021, in the United States, of the 1,538 capital outflows made by venture capitalists, 1,357 (ie 88.2%) were the result of an acquisition by a large company against 181 through an initial public offering.

Upstream of innovation, large companies such as GAFAM participate massively in financing start-ups and the ecosystem ofopen innovation through your funds corporate venture capital. The Google Venture fund holds more than $8 billion in investments in start-ups, some of which have been or will be acquired by the parent company. In 2021, in the United States, venture capital funds from large companies contributed US$142.2 billion of the US$332.8 billion in venture capital investments made in the country, or 42.7%.

It is therefore necessary to place the acquisitions of start-ups by GAFAM and other large groups in the global functioning of ecosystems ofopen innovation. These acquisitions promote the acceleration and industrialization of innovation, providing financing, technological capacity building and marketing. These acquisitions also constitute a formidable incentive mechanism to contribute to the creation of innovative start-ups for the other players in the ecosystem, be they entrepreneurs, employees, university researchers, venture capitalists and all service providers. services remunerated in shares or stock options -ups.

Preventing large companies from acquiring start-ups would therefore constitute a questioning of the functioning of theopen innovation and would lead to the removal of critical actors from the innovation lifecycle. The economic interest of a group that acquires a start-up is to develop it to fuel its growth and to monetize its investment. When Facebook acquired the startup Instagram (founded in 2010) in 2012 for a billion dollars, then it invested heavily in financial, technological and commercial resources to increase the number of users from 30 million in 2011 to another two billion by the end of 2021.

A large group that swallows a complementary, non-competing innovation from an acquired start-up would be economically irrational. Large groups tend to weaken start-ups that refuse to be acquired, namely by copying their features. Netscape refused in 1994 to be bought by Microsoft and ended up disappearing in the face of competition from Microsoft Explorer. In 2013, Snapchat turned down a takeover offer from Facebook and has since continued to see its potential buyer weaken it by copying it.

What is the role of the regulator?

Once it is accepted that these acquisitions constitute a factor of acceleration and not of predation of innovation, it is worth asking about the role of the legislator. The danger is that when the acquired innovation reaches maturity, it acquires a monopoly position, which is done to the detriment of new innovations.

If the Google Store were an independent entity, it would not favor other Alphabet products. Therefore, it is necessary to regulate the GAFAMs when their new activities reach maturity. The legislator could impose divisions of mature innovations through spin-offs. Today, separate YouTube from Google, Instagram from Facebook, or LinkedIn from Microsoft.

On the other hand, in terms of innovation, Europe must be concerned about the fragility of its venture capital industry. Amounts invested remain low and more and more US venture capital funds are investing in Europe and competing with European funds with much larger capital.

Since 2016, Insight Partners has made 84 investments in European start-ups, Accel 59, Tiger Global Management 51 and Index Ventures 46. These funds are the Trojan horse of large US companies that sometimes fund these venture capitalists who give them access to private information in these European start-ups, but above all to buy them back at higher prices than those offered by large European companies.

In 2021, US venture capitalists participated in 2,210 investment rounds in Europe for a value of €70.7 billion. The average amount of capital raised by a European start-up is €38 million when an American fund participates in the funding round compared to just €6.3 million when there is no American investor.

What is important for European sovereignty is therefore to develop a powerful venture capital industry that is well connected with the continent’s leading companies to promote the development of innovative start-ups. We’re still a long way off. In 2021, European venture capital firms raised just €18.2 billion, 18% of which through corporate funds.

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