For several decades, the United States has generally adopted a relaxed approach to enforcing antitrust regulations, infrequently intervening to prevent mergers, even those involving international companies. However, indications suggest a potential shift in this trend. Recent events, such as the termination of the Visa and Plaid merger following a lawsuit from the Department of Justice in November, and the cancellation of consumer product goods company P&G’s proposed acquisition of shaving startup Billie after a suit by the Federal Trade Commission in December, demonstrate this changing landscape.

While numerous deals continue to successfully navigate the regulatory process, even a limited number of these developments are sufficient to raise concerns. This new dynamic occurs even before considering the numerous antitrust reform proposals currently being debated in Washington, D.C., which, with bipartisan support, aim to establish stricter controls, especially within crucial technology sectors and information services.

Considering this evolving situation, what are the implications for startup valuations, particularly given that a key exit strategy is becoming increasingly uncertain?

Currently, market conditions are bolstering valuations, with investors displaying a strong appetite for growth stocks. Affirm, for example, debuted on the public market at a price of $49 per share, exceeding initial expectations of $41 to $44 and a prior range of $33 to $38 after filing for its initial public offering. Similar increases have been observed in the valuations of other recently launched tech stocks.

Furthermore, Special Purpose Acquisition Companies (SPACs) are contributing to higher valuations. These entities, designed to facilitate acquisitions, operate under time constraints – typically around two years – to complete a merger. As the initial wave of SPACs approaches these deadlines, they are actively seeking acquisition targets, which is expected to support startup valuations and reflect the overall market exuberance.

Despite these factors, acquisitions remain a significant and often less complex exit option for startups compared to an Initial Public Offering (IPO). Historically, acquisitions were the primary exit route for high-growth startups, with those seeking continued independence often relying on further rounds of funding. However, with two dozen prominent tech IPOs completed recently, this ratio may be shifting.

Acquisitions can rapidly increase purchase prices. The recent acquisition of NUVIA by Qualcomm for $1.4 billion exemplifies this. The startup, only two years old and developing a next-generation chip, lacked viable IPO or SPAC options, but its talented team and innovative technology attracted a substantial offer from Qualcomm and likely other major chip manufacturers.

The central challenge is that the companies with the most substantial financial resources and the greatest interest in acquiring startups are often those facing the highest level of antitrust scrutiny. While some acquisitions involve expansion into entirely new markets with minimal antitrust concerns, many, like the proposed $40 billion merger between Nvidia and ARM, would significantly increase the acquiring company’s market share and influence.

Antitrust regulations are unlikely to eliminate acquisitions altogether, but they could exclude the highest-bidding companies, potentially leading to a decrease in acquisition prices.

So far, valuations have not been broadly impacted, although public market enthusiasm may be masking any effects. However, certain sectors are already facing increased scrutiny, which will undoubtedly affect valuations.

Consumer-product goods, particularly the direct-to-consumer (DNVB) model, is one such area. Following the FTC’s blocking of the Billie acquisition and a similar decision regarding Harry’s in 2020, it’s evident that U.S. antitrust authorities prioritize competition in the consumer goods market.

This impacts a wide range of startups that emerged with the rise of Instagram, influencer marketing, and the DNVB approach. While many of these companies demonstrate growth potential, they may lack the independent strength to pursue an IPO. For some investors, acquisition by a larger company like P&G was the intended outcome, but that path now appears more challenging, with limited alternative options. Consequently, I anticipate that consumer goods startups will experience greater downward pressure on valuations this year as this reality becomes clearer.

Another area receiving increased attention is the integration of “infrastructure” startups into major tech companies, such as Google’s acquisition of DoubleClick or Facebook’s purchase of Onavo. These acquisitions have enabled tech giants to gain significant control over online advertising and strengthen their market positions.

A substantial amount of attention in Washington, D.C. regarding antitrust reform has focused on these types of acquisitions, and I expect them to become less frequent as companies assess their ability to secure regulatory approval.

Fintech is also facing greater scrutiny, as demonstrated by the Visa and Plaid deal’s collapse, reflecting increased oversight of financial services not only in the United States but also in China, India, and Europe. Concerns exist regarding the concentration of power among tech companies in fintech, as well as the efforts of established companies to leverage their existing market positions to dominate emerging technologies. As a result, fintech companies may face similar challenges to Affirm, relying on public markets or private equity buyouts.

One sector that has largely avoided scrutiny is Software as a Service (SaaS). Mergers and acquisitions in the SaaS space appear to be generally acceptable to regulators, potentially due to the relatively early stage of many of these companies and the presence of significant established competitors. However, this could change in the future. A prominent deal like Salesforce’s acquisition of Slack for $27.7 billion has not yet raised significant regulatory concerns.

With the incoming Biden administration, further clarity will emerge regarding the policies of the Justice Department under presumed Attorney General Merrick Garland. Regardless, antitrust considerations must increasingly be factored into startup valuations, and depending on the specific industry, could have substantial implications for future values.