FTC Chair Lina Khan: Startup Spoiler

By SBE Council at 1 December, 2022, 8:57 pm

SMALL BUSINESS INSIDER

By Karen Kerrigan –

“If you can’t grow via acquisition, what’s the alternative? You basically create a walled garden of innovation. You are making all that innovation internally and you’ve basically shut out everybody else.”

– Daniel Sokol, Professor, Carolyn Craig Franklin Chair in Law and Business, Affiliate Professor of Business, Marshall School of Business, USC Gould School of Law, June 2022 at “M&A Regulatory Revamp: Is the Innovation Ecosystem at Risk?”  

U.S. Startup Ecosystem and Innovation at Risk

America’s robust startup ecosystem relies on incentives and a policy foundation that encourages risk-taking, investment, and a dynamic environment that allows for companies both young and old to connect with the resources, capital and partners they may need to scale, perhaps re-organize, and ultimately thrive in the competitive marketplace. The U.S. economy has soared as a result of this dynamism, thanks in big part to the dreams and hard work of our entrepreneurs.

As I noted in an interview with Concurrences following a conference SBE Council hosted this past summer (you can view a recording of the event here), America’s favorable merger and acquisition (M&A) system:

“…has really worked well for bringing innovations to the market, by matching innovations to the scale and resources that are needed to take those innovations to the mass marketplace and to the benefit of consumers.”

But as I and others warned at this June event, America’s fruitful M&A system is under attack.

Overzealous policymakers and regulators within the Biden Administration are pursuing an irrational agenda that could permanently damage not only the startup ecosystem, but our country’s innovative and technological leadership.

Most notably, Federal Trade Commission (FTC) Chair Lina Khan, who brings a well-known anti-big tech bias to her latest policy role, has expanded her “big is bad” war to include many other industries.  By stopping and hamstringing acquisitions that plainly benefit consumers and pose no harm, Khan’s FTC is doing exactly what our international competitors love to see –  self-administered domestic policies that erode U.S. leadership in startup activity, tech innovation, and general economic prowess.

Khan’s Message to Entrepreneurs and Startups: Don’t Innovate, Don’t Take Risks, Don’t Dare to Dream Big

As SBE Council has noted in various papers and reports on the misdirected actions under Khan’s leadership (see, for example: FTC Getting More Political, Radical and Unaccountable, and FTC’s Bizarre Attempt to Rationalize Regulatory Overreach) the FTC has gone off the rails in its pursuit of “competition.” For example, in the case of Meta’s acquisition of Within, a nascent company that created the VR fitness app Supernatural, Khan has clearly established that her grasp of the competitive marketplace is out-of-touch with reality. Specifically, the FTC’s claim that the acquisition would “tend to create a monopoly” is, of course, speculative and lacking in basic facts. Even the FTC professional staff recommended against bringing a case against Meta.

Moreover, in an unprecedented move, the FTC amended its original complaint, paring back one major claim. Perhaps Chair Khan should have listened to her professional staff rather than push the legal envelope in her “act fast” (see below) zeal to stick it to big-tech, no matter what the outcome.

In sum, the FTC has not proven that Meta’s acquisition of Within would prove harmful to consumers or competition, or that it violates the law. We’ll see what the courts decide, but what is glaringly harmful is the growing list of FTC actions that are undermining America’s startup entrepreneurs and their innovations.

Big Losers: U.S. Startups and the Emerging VR App Market

If allowed to move forward, the outcome of Khan’s FTC agenda is not a positive one for startups or even competition. As noted by the Foundation for Economic Education (FEE) in an article about Kahn’s “radical antitrust agenda,” Saul Zimet writes:

With the advent of Khan’s radical new approach, the F.T.C. is now working to achieve the exact opposite of what ftc.gov claims is the purpose of ensuring market competition through antitrust enforcement: “…lower prices, higher quality products and services, more choices, and greater innovation.”

This approach is not only likely to increase prices for existing technologies, but the initiative against the trade of technology companies will disincentivize the creation of new tech startups and thus reduce the amount of innovation and the choices of products on the market as well.

As most policymakers and regulators should know, the U.S. economy across all sectors is dominated by small to mid-size businesses. And while starting and growing a business is challenging, the U.S. has experienced a boom in new business applications over the past two years. Once (and if) these new businesses launch, they need as much support and encouragement as possible. Not surprisingly, many of these startups wish to be acquired (13% of startups said that is the case in a recent SBE Council survey), and once acquired many of these entrepreneurs move on to start their next business. This positive and dynamic cycle of risk-taking and entrepreneurship is what keeps our nation’s economy strong and globally competitive.

Nathan Lindfors, Policy Manager for Engine, noted at our recent conference that this M&A activity is critical for local and regional economies, as well as for a broad range of industries:

“A robust M&A system drives the startups that drive the innovation that we all benefit from. For startups not in the big ecosystems like Silicon Valley, M&A becomes the only feasible exit and is critical to building [local] ecosystems and economic growth.”

In fact, according to a recent National Small Business Association (NSBA) survey, mergers and acquisitions are an important part of the business owner’s exit strategy as the business matures and grows – nearly half of small-business owners – 43% – say a merger or acquisition is important to their business exit strategy.

U.S. Tech Leadership is at Stake: The next wave of technological innovation in the U.S. has emerged. Immersive technologies will fuel U.S. economic growth, productivity, new innovations, entrepreneurial startups and positive changes for a variety of industries. But VR app innovation and development is needed to fuel this immersive future and the promise of the metaverse. The FTC’s move against the Meta acquisition throws cold water on the future of immersive technology and innovation. After all, app development counts on venture capital funding, which counts on an acquisition for return on investment. As noted by the Information Technology and Innovation Foundation (ITIF):

“These early investors in VR app development expect to see a return on their investment. The most common way this happens is through acquisition. In 2020, nearly 90 percent of all venture-backed startups exited their venture-funding through an acquisition. The looming threat that this exit strategy may no longer be available, or will face costly litigation, will limit the ability of small studios to access venture capital and thereby reduce VR app innovation.”

Khan’s Fires Warning Shot: Beware “nascent industries across sectors”

Rather than consumers, the market, and entrepreneurs deciding the fate of technological innovation and the success of new products and services, Khan firmly believes that it’s the FTC job – that they somehow own this amazing super power – to determine what technologies or consumer products and services will take hold in the market, and who or what these technologies will compete against in the future.

The “consumer harm” standard – a principle that has worked extremely well over the years – is being tossed and/or minimized in favor of regulators peering into crystal balls and playing arbitrary guessing games to determine action for or against a proposed acquisition or merger. Of course, the approach is both arrogant and frightening. It cannot be allowed to stand.

Khan’s September 2021 communique to agency staff is quite heady in its approach, urging staff to be “forward looking” and to act fast to mitigate harm, paying special attention to “next-generation technologies, innovations, and nascent industries across sectors.”

…across sectors. That means all sectors are targets – not just big tech – which is why the entire American business community should be alarmed by the FTC’s haughty activism.

The frailty of the U.S. economy requires stable, pro-business policy that encourages the type of risk-taking, entrepreneurship and investment that Khan’s FTC appears to be working against. Congress – on both sides of the aisle – need to focus on the agency’s damaging actions and agenda, and take immediate steps to rein in unwarranted interference in productive M&A activity and related actions that undermine our small businesses and U.S. innovative and economic leadership.

Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council.