Startups are increasingly redefining their exit strategies in light of heightened antitrust enforcement, according to new research by Brian Broughman, Matthew Wansley, and Samuel Weinstein. As regulatory scrutiny intensifies, many firms are choosing to remain private longer, which raises significant questions for competition policy.
In March 2024, the founders of Inflection AI, valued at $4 billion, abruptly resigned, transitioning to roles at Microsoft. The majority of Inflection’s 70 employees followed suit. Microsoft acquired the remnants of Inflection for $650 million, which included a $620 million license for its AI models and $30 million as a settlement to prevent legal action over employee poaching. This transaction enabled Inflection to pay off its investors, including venture capital firm Greylock. Similar deals occurred in the following months, with Amazon and Google executing comparable transactions with startups Adept AI and Character AI. These acquisitions, labeled “reverse acquihires,” eluded reporting to antitrust enforcement agencies.
Prior to these developments, Microsoft had invested $10 billion in OpenAI, marking a significant shift in corporate venture capital dynamics. The partnership expanded as OpenAI’s models became integrated into Microsoft’s products like GitHub. Concurrently, Amazon and Google directed billions toward emerging startup Anthropic, also remaining under the radar of antitrust review despite exceeding valuation thresholds set by the Hart-Scott-Rodino Act (HSR).
In recent years, two notable trends have emerged among VC-backed startups. The number of unicorns has surged, leading to an increase in secondary transactions where stakeholders can sell shares without necessitating a formal exit like an IPO or acquisition. According to Industry Ventures, the secondary market quintupled from $12 billion in 2010 to $60 billion in 2021. Additionally, venture capital funds have employed continuation funds—structures borrowed from private equity—allowing investors to remain engaged with portfolio companies beyond the fund’s typical lifespan while also enabling some investors to exit.
These shifts indicate a growing reluctance among startups to pursue traditional exits. Historically, startups would seek exit opportunities—via IPOs or acquisitions—after several rounds of capital. However, with the changing landscape, many are opting for no exit at all, choosing new paths such as reverse acquihires and centaurs—private firms primarily backed by public company funding—while also utilizing secondary markets and continuation funds to enable liquidity for founders and investors.
The evolution of antitrust enforcement began to take shape during the latter part of the Trump administration and accelerated under President Biden. Appointees like Lina Khan, chair of the Federal Trade Commission, and Jonathan Kanter, leader of the Antitrust Division at the Department of Justice, have heightened scrutiny on startup acquisitions. They have challenged more deals and made the merger review process lengthier and more complex. For instance, from 2012 to 2019, only three startup acquisitions faced challenges, compared to 14 from 2020 to 2023.
This uptick in scrutiny has naturally led to a chilling effect in Silicon Valley, where the risk of acquisition has increased, prompting startups and their potential acquirers to rethink their strategies. While some might anticipate a rise in IPOs as acquisitions become more uncertain, the dynamics suggest that many startups are simply avoiding exits altogether.
Some developments in antitrust policy indicate that regulators must consider the broader implications of their actions. Restricting exits can alter how startups view their options, potentially leading to a situation where both acquisitions and IPOs are discouraged. This dual approach may result in startups opting to remain private longer, consequently evading antitrust laws and adopting new, potentially harmful structures. The article “No Exit,” forthcoming in the NYU Law Review, elaborates on these developments.
However, the authors argue that some antitrust enforcement actions need to be more rigorous. For example, reverse acquihires should not escape scrutiny, as they can stifle competition just like traditional acquisitions. Regulators should be vigilant in ensuring that companies cannot sidestep merger enforcement through creative structuring of transactions.
While the long-term impacts of the ongoing antitrust crackdown remain unclear, there are signs of resilience within the startup ecosystem. Even amidst declining venture activity in recent years, fundraising remains historically high. The rise of employee tender offers and continuation funds illustrates that startups and VCs are adapting to find new avenues for capital and liquidity.
Nevertheless, concerns about transparency persist. In the past, startups that significantly impacted society typically underwent scrutiny through public market disclosures, either via IPOs or acquisitions. If startups remain private or evolve into centaurs, the intended objectives of antitrust enforcement may not be realized, leaving socially important companies in obscurity and potentially undermining competitive markets.
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