Tuesday 14 September 2021 12:24 pm

Over half of UK tech investors ready to pull capital over proposed clampdown on startup M&A

Investors in UK startups are ready to pull capital over the threat that a proposed competition clamp down on startup M&A by the CMA’s new Digital Markets Unit (DMU) poses to the country’s startup innovation and growth.

Half (50 per cent) of the UK’s investors in startups will significantly reduce the amount they invest in the country’s early stage companies if the ability to exit is restricted, according to a new survey by startup body the Coalition for a Digital Economy (Coadec).

A further 23 per cent of investors said they would stop investing in UK startups altogether if the proposed tougher takeover regulation was introduced.

It comes after the CMA recommended that the DMU – the new public body launched by the government in April and tasked with regulating the UK’s powerful digital sector – is given expanded powers to investigate M&A deals in the sector.

Currently, the CMA intervenes in mergers or acquisitions “on balance of probabilities”, for example if there is a greater than 50 per cent likelihood that an acquisition will lead to a substantial lessening of competition (SLC).

But the DMU has proposed lowering this bar to a tougher new criteria of a “realistic prospect” of SLC.

This, Coadec argues, goes further than the proposals made by a Digital Competition Expert Panel for the DMU to introduce a “balance of harms” approach that takes into account the scale of a merger and the startups involved, as well as the likelihood of harm.

By clamping down harder than this, the DMU “threatens the foundations of the tech ecosystem”, Coadec said in a new report.

“For startups, M&A is an effective way to recycle money and talent around the ecosystem,” the body said in a statement. “It also helps them compete with Tech Giants.”

If the DMU goes ahead with its proposed tougher takeover rules, Coadec estimates that venture capital invested in UK companies could drop by £2.2bn and dent UK economic growth by as much as £770m.

Focusing on the giants

Alongside investors’ fears surrounding the tougher takeover rule proposals, almost two thirds (60 per cent) felt that UK regulators only had a basic understanding of the UK’s startup and scaleup market, while two in ten (22 per cent) believed they didn’t understand it at all.

Their perceptions of the UK government’s understanding of the booming sector was even worse: 80 per cent of investors believed British lawmakers only had a “basic understanding” of the sector.

Investors’ main concern surrounds UK regulators’ limited understanding of the whole digital sector and the early stage startups it involves, as 70 per cent of investors felt the watchdog only thought about tech giants when designing competition rules.

“Startups thrive in competitive markets. But nurturing an ecosystem means knowing where to intervene and when not to,” said Dom Hallas, Executive Director of Coadec.

“The data shows that not only is there a risk that the current proposals could miss some bad behaviour in some areas like B2B markets whilst creating unnecessary barriers in others like M&A. Just as crucially, there’s frankly not a lot of faith in the regulators proposing them either.”