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The Paradox of Startup Acquisitions: Eliminating Competition and Creating New Competitors

The past few decades have seen a significant increase in the acquisitions of startups by incumbents. As these acquisitions can enhance the incumbents’ market power, they have raised concerns regarding their potential anti-competitive effects. By incorporating a dynamic perspective, this study argues that these acquisitions can detract the autonomy of the acquired workers and subsequently prompt them to leave to launch their own ventures – ultimately contributing to a more robust competitive landscape over the long-term. We provide empirical support for this argument by analyzing employee-employer matched data from the US Census on high-tech startup acquisitions and their workforce between 1990 and 2011. We also find support for our mechanism regarding employee autonomy by showing that the impact of startup acquisitions on employee entrepreneurship increases when the target startup is integrated by the acquirer, whereas this impact significantly decreases when the target firm is provided with autonomy. Overall, our study points out that it is important to consider post-acquisition mobility patterns when examining the incumbents’ acquisitions of startups.