Kill Zones? Measuring the Impact of Big Tech Start-up Acquisitions on Venture Capital Activity

Kill Zones? Measuring the Impact of Big Tech Start-up Acquisitions on Venture Capital Activity

Tiago S. Prado

Quello Center at Michigan State University

Abstract

This paper investigates the influence of the five largest U.S. digital platforms on venture capital activity worldwide. In the last 20 years, the big techs have been intensive in acquiring promising start-ups in their early stages of development, a strategy to defend their established markets that may quench innovation. Some authors have suggested the existence of “kill zones for innovation”, that are industry segments in which the presence and strategic interests of digital platforms discourage investments from venture capitalists. Our analysis does not support such a claim. We use an event-study empirical design with heterogenous treatment timing to identify the impact of big tech’s main acquisitions on the number of venture deals, as well as on the amount of venture investments driven towards start-ups of more than 170 industry sectors. Using a rich dataset of more than twenty-five thousand venture capital deals reported worldwide from 2010 to 2019, we found a persistent positive impact of the big tech start-up acquisitions on the appetite of venture capitalists to also invest in start-ups of similar industry segments. Moreover, the results suggest that this effect on venture capital activity is greater outside the U.S. than inside, what may be explained by the more dynamic and intense venture capital activity in the U.S. when compared to other countries. This empirical analysis may contribute to the debate on whether platforms significatively harm innovation, and how such processes may vary across countries of different geographic regions and with different levels of economic development.