A recent report from Beauhurst suggests that UK exit activity is on a strong growth trajectory. In 2021, the value of exits grew from £9.25 billion in 2020 to £26.7 billion and the number of exits grew from 452 to 781. A flurry of M&A activity has contributed to an impressive year for VCs who are investing record amounts in UK startups.
As Sam Bowman and Sam Dumitriu note in their briefing paper Better Together, exits are vital to the health of London’s start-up ecosystem. They provide early stage investors with liquidity that can be recycled into UK startups and release founders, giving them an opportunity to start or back new ventures.
However, the government has been consulting on overhauling the merger control regime for digital platforms such as Google and Facebook. The proposed change would lower the burden of proof needed by the Competition and Market Authority (CMA) to block mergers by companies deemed to have ‘strategic market status’ (SMS). In effect, the proposals would ban tech giants from acquiring British tech startups. This would have major implications for investment in startups.
Startup formation and VC investment are both extremely sensitive to the availability of exits, the vast majority of which are via acquisitions as opposed to listing on a stock market.
According to Beauhurst, while both IPOs and acquisitions experienced a dramatic uptick in 2021, of the high-growth companies that exited, 49 were by IPO and 732 were by acquisition, making it clear which is the dominant exit strategy. Unsurprisingly, investors and startups are concerned.
In Better Together, Bowman and Dumitriu cite a Coadec survey of VCs, which found half would ‘significantly reduce’ the amount they invested if the ability to exit through M&A was restricted. Real-world data suggests the VCs aren’t bluffing. Multiple studies find that restrictions on takeovers tend to have a strong negative impact on VC activity.
In addition to being a record year for exits, London tech investment has boomed in 2021 with VC funds investing record amounts. As highlighted in Dealroom’s report, London currently ranks fourth in the world for investments and unicorns.
There is a serious risk that if the government follows through with plans to block tech acquisitions that the UK will fall behind the EU and become a less attractive place for VC investment. Neither the US or EU are likely to follow suit and effectively ban Google / Facebook from M&A, even if they plan to go further on other aspects of competition policy.
Recent reports suggest that the Government is softening its approach citing concerns that Britain’s startup activity will be stifled. This is welcome news and will lead to the UK remaining an attractive destination for tech startups.