Lawmakers Plan to Tank the Startup Economy – The Wall Street Journal

Research in recent years has demonstrated that new businesses account disproportionately for the innovations that drive productivity growth, economic growth and new job creation. But a third of new businesses fail by the second year, half by their fifth. Fragile startups face three principal fates: fail, go public or be acquired, with failure the most common. Many entrepreneurs dream of taking their companies public, but most startups never achieve the scale that requires.

Acquisition, therefore, is the most likely avenue for successful entrepreneurs and their employees to realize the value of their creation. In a typical year, more than 10 times as many startups are acquired as go public. According to a recent report by Silicon Valley Bank, nearly 60% of startups expect to be acquired. Acquisitions also enable startup investors to reclaim their capital, realize any gains, and recycle their money into the next generation of startups.

As a serial entrepreneur, I understand the threat the legislation poses to America’s startup ecosystem. In 2001 I started SVOX, a Switzerland-based company that developed text-to-speech software for automotive and mobile device applications. After years of hard work, my partners and I sold the company to
Nuance Communications
for $125 million.

In 2006 I moved to the U.S. to earn a master’s degree in technology management from the Massachusetts Institute of Technology. In 2008 I launched Pixability, a pioneer in video marketing software and services that now employs 85 people in Boston. On the eve of the pandemic, I founded juli, an artificial-intelligence-powered health software company that manages chronic conditions. For the third time in my career, I’ve launched an investor-financed company that will have to return the invested capital by either going public or getting acquired.

The Platform Competition and Opportunity Act would threaten the startup ecosystem by obstructing the most common positive outcome for entrepreneurs and their investors, short-circuiting the process by which value-creating innovation helps fund the next generation of new businesses. Had it been in effect for the past five years, the act would likely have blocked more than 100 acquisitions of venture-capital-backed companies, according to the National Venture Capital Association.

If investors are unable to liquidate investments to reclaim capital and potential gains, they won’t risk their capital by investing. Without investors, there is no startup ecosystem.

The bill poses an even more serious risk—that it will bring about the opposite of what it intends by tilting regulatory circumstances in favor of larger companies. Something along these lines happened in 2002, when Congress passed the Sarbanes-Oxley Act to enhance the quality and reliability of financial data reported by publicly traded companies. Section 404 of the act requires companies to disclose the findings of an external audit of the scope, adequacy and effectiveness of the company’s internal control structure and procedures for financial reporting.

Section 404, only 170 words long, has accounted for the majority of the cost of complying with Sarbanes-Oxley, estimated to be well over $1 million per company annually. The cost and burden of complying with section 404 is a major obstacle for many new and rapidly growing companies hoping to access the capital markets for financing.

For me personally, that meant giving up (for now) on my girlhood dream of running a public company.

In an interview with Bloomberg in March 2012,

Steve Case,
a co-founder of America Online, said: “When AOL went public 20 years ago, we only raised $10 million. Nobody could do that now because of the cost of Sarbanes-Oxley.” In testimony before the House Financial Services Committee in June 2012,

David Weild,

a former vice chairman of Nasdaq, said that the number of small-company IPOs valued at $50 million or less plummeted by 92% in the six years following the enactment of Sarbanes-Oxley.

The Platform Competition and Opportunity Act risks similar unintended consequences. By dramatically raising the regulatory hurdles and compliance costs of acquisitions, the act would benefit large incumbent companies that have money and teams of lawyers to navigate the new legal landscape. Smaller companies would be shut out. And the narrowing of the acquisition market to only the largest companies would drive down prices for smaller companies like mine. In this way—ironically—the bill would likely deepen and widen the competitive moat protecting large incumbent companies from smaller, more innovative challengers.

If lawmakers are concerned that acquisitions by large technology companies undermine competition, the better course of action would be to increase the frequency and capacity of existing regulatory scrutiny by augmenting the resources of the Federal Trade Commission and the Justice Department’s Antitrust Division, which already have the authority to block anticompetitive mergers. Between 2010 and 2020, the government won 79% of challenges to mergers in federal court, according to a paper published in the Review of Industrial Organization.

Thriving entrepreneurship is the essential pathway to the faster economic growth, job creation and opportunity expansion that the American people need. Legislation that would virtually shut down a major avenue of exit for entrepreneurs and their investors, and strengthen the competitive position of large companies, risks major damage to America’s entrepreneurial ecosystem and the post-pandemic recovery.

Ms. Hein is founder and CEO, most recently, of juli, a digital health startup.