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As UK Gov reaches out to tech, investors threaten to 'pull capital' over M&A regulator over-reach

·3-min read

U.K. competition regulators are spooking tech investors in the country with an implied threat to clamp down on startup M&A, according to a new survey of the industry.

As the U.K.’s Chancellor of the Exchequer engaged with the tech industry at a "Chatham House" style event today, the Coalition for a Digital Economy (Coadec) think-tank released a survey of over 50 key investors, which found startup investors are prepared to pull capital over the prospect of the Competition and Markets Authority’s (CMA) new Digital Markets Unit (DMU) becoming a “whole-economy regulator by accident”. Investors are concerned after the CMA recommended the DMU be given 'expanded powers' regarding its investigations of M&A deals.

Controversy has been stirring up around the DMU, as the prospect of it blocking tech startup acquisitions -- especially by U.S. firms, sometimes on the grounds of national security -- has gradually risen.

In the Coadec survey, half of investors said they would significantly reduce the amount they invested in U.K. startups if the ability to exit was restricted, and a further 22.5% said they would stop investing in U.K. startups completely under a stricter regulatory environment.

Furthermore, 60% of investors surveyed said they felt U.K. regulators only had a “basic understanding” of the startup market, and 22.2% felt regulators didn’t understand the tech startup market at all.

Coadec said its conservative estimates showed that the U.K. government’s DMU proposals could create a £2.2 billion drop in venture capital going into the U.K., potentially reducing U.K. economic growth by £770 million.

Commenting on the report, Dom Hallas, executive director of Coadec, said: “Startups thrive in competitive markets. But nurturing an ecosystem means knowing where to intervene and when not to. The data shows that not only is there a risk that the current proposals could miss some bad behavior in some areas like B2B markets whilst creating unnecessary barriers in others like M&A. Just as crucially, there’s frankly not a lot of faith in the regulators proposing them either.”

The survey results emerged just as Chancellor Rishi Sunak convened the “Treasury Connect” conference in London today, which brought together some of the CEOs of the U.K.’s biggest tech firms and VCs in a "listening process" designed to reach out to the industry.

However, at a press conference after the event, Sunak pushed back on the survey results, citing research by Professor Jason Furman, chair of the Digital Competition Expert Panel, which has found that “not a single acquisition” had been blocked by the DMU, and there are “no false positives” in decision making to date. Sunak said the “system looks at this in order to get the balance right.”

In addition, a statement from the Treasury, out today, said more than one-fifth of people in the U.K.’s biggest cities are now employed in the tech sector, which also saw £11.2 billion invested last year, setting a new investment record, it claimed.

Sunak also said the Future Fund, which backed U.K.-based tech firms with convertible loans during the pandemic, handed U.K. taxpayers with stakes in more than 150 high-growth firms.

These include Vaccitech PLC, which co-invented the COVID-19 vaccine with the University of Oxford and is better known as the AstraZeneca vaccine which went to 170 countries worldwide. The Future fund also invested in Century Tech, an edtech startup that uses AI to personalize learning for children.

The U.K. government’s £375 million Future Fund: Breakthrough initiative continued from July this year, aiming at high-growth, R&D-intensive companies.

Coadec’s survey also found 70% of investors felt U.K. regulators “only thought about large incumbent firms” when designing competition rules, rather than startups or future innovation.

However, the survey found London was still rated as highly as California as an attractive destination for startups and investors.

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