Big tech may be driving some chunky returns for investors, but one consequence of the dominance of the likes of Meta (US:META) and Alphabet (US:GOOGL) has been a significant drop in the number of new companies listing on the stock market.
General listing numbers have been impacted by the uncertain macro climate and higher interest rates. Rising rates have also meant bad news for venture capital (VC) investors, who help push businesses to list, meaning fewer and fewer initial public offerings (IPOs) have taken place.
But for nascent tech businesses, the dominance of big tech has been a key factor stopping them going public. If such companies do opt to list, they are then immediately competing for investor attention against businesses that have huge economic moats and market sway. Delivering the growth that such investors are used to is extremely difficult in this environment.
Research from academics at Chicago and Columbia has examined how the big tech companies have created a “kill zone” around themselves which prevents competition and eliminates threats from new market entrants.
One way they do this is by simply buying up potential competitors. The big tech giants have made hundreds of acquisitions over the past 15 years. The paper finds that in the three years following a major acquisition by Meta or Alphabet, VC investment in that sector plunges by more than 40 per cent and deal numbers collapsed by more than a fifth.
This defies conventional thinking. Shouldn't the prospect of an acquisition at a premium price incentivise more investment in smaller businesses and listings? The academics conclude no: the economics of big tech is unique, and there is a lack of price competition, and negative externalities.
Instead, start-ups choose to be snapped up by a bigger player instead of going public. This is reflected in US-based IPO data as the chart below shows.
Joachim Klement at Liberum summed up the tech start-up predicament in a recent note. “Go public and compete with these tech behemoths or sell out to them and grow within their ecosystem, backed by their enormous resources. No wonder many start-ups decide to sell themselves to large incumbents. And that, in turn, has a chilling effect on VC investments in start-ups in these sectors”, he said.
And if a start-up doesn't sell, then it faces having its features subtly (or not so subtly) copied. Facebook has used its Stories feature to undermine Snapchat, which has rejected bids from both Meta and Alphabet in the past.
The situation isn't good for consumers. A monopolistic tech market also means a distinct lack of competition, with the incumbents not feeling the pressure to improve their products and services.
But it's not all bad. There is another school of thought that suggests higher rates could also boost VC investment in smaller companies and make things better for consumers and investors. This is because expensive debt also makes it difficult for big tech stocks to make acquisitions, and the deals become less lucrative.
If big tech is less inclined to buy out rival businesses, more start-ups could be forced onto the stock market to access a greater pool of finance to keep on growing. This would ultimately offer investors a wider range of companies to think about and reduce their reliance on big tech.
Then, the giants would feel more heat to improve their services in the face of more competition. Not a bad thing to hope for. But it's a wait-and-see on who blinks first: big tech or venture capitalists.
