When the Government published the Digital Markets, Competition and Consumer Bill in April, I was encouraged. As the Chair of Coadec – an organisation I helped found over a decade ago – I could see that a competition regime that focused more closely on the dynamics of technology-driven businesses could hugely benefit the UK startup ecosystem. Indeed, as our Executive Director Dom Hallas said at the time, too many startups are ‘grappling with bed-blocking incumbents in broken markets’.
But at the same time, I have first-hand experience of the Competition and Markets Authority (CMA) getting it wrong in this space.
As the now exited founder of Seedrs, the equity crowdfunding platform I helped build over the past decade, I was at the coalface in 2021 when the CMA blocked what I (and many others in the startup ecosystem) believed would have been a highly pro-competitive merger between my company and another British firm. The CMA’s decision, in my view, came down to their essentially 20th century view of how markets work and, as a result, their profound misunderstanding of the competitive dynamics in the market in which we were operating.
Entrenchment and expansion of those kind of misunderstandings, if that’s what the CMA’s proposed new powers lead to, would not be good for anyone.
It’s worth starting with the basics. The facts are clear – startups thrive in competitive markets.
In recent years we’ve seen a meteoric rise in Britain’s homegrown tech sector. All this has made us a global powerhouse for tech. Startups have done this by beating incumbents at their own game. In financial services, health, retail and beyond — traditional firms are being upturned as customers find a better service from British startup competitors.
At the same time, there’s no denying that some competition issues in the tech sector have festered for too long. When Coadec surveyed UK tech investors in 2021, 80% said they were concerned about incumbent firms making it harder for start-ups to break into markets.
The Digital Markets Unit (DMU) is set to add critical expertise to the CMA at a time when tech is becoming one of the most fundamental sectors to the success of the UK economy.
But there is also a lot of trust for regulators to repair: 60% of investors told us they felt regulators had only a ‘basic understanding’ of tech startups, a further 22% thought regulators had none at all.
As someone who has experienced that lack of understanding first hand, it’s not hard to see why.
So regulators must learn the lessons from the journey that I and others have already been on – and need to be aware of a few key facts about the startup ecosystem that will create the challengers to today’s tech giants.
Startups want a pro-competitive regime that proactively supports innovation rather than one that ends up lazily regulating big tech like lumbering utilities. The former path challenges incumbents; the latter tends to cement the status quo in place.
That means competition authorities being more taking a more expansive view of M&A among challengers who are building competitors to large incumbents in huge markets. It means also creating a pragmatic and innovative regulatory environment that recognises that competition among technology-led businesses often plays out in different, and more complex, ways than it does in the ‘traditional’ economy.
Our new paper, published today, hopes to provide some thoughts on how best to do this, both for the Government through the DMCC Bill and for the CMA themselves in administering the system on the ground.
For the sake of the startups that will follow me in engaging with the regulator in the coming years – whether they are acquirers or acquirees – I really hope they listen.
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