Read Aloud the Text Content

This audio was created by Woord's Text to Speech service by content creators from all around the world.

Text Content or SSML code:

1.1 Main Results Recall that in Figure 1 we plotted the raw number of early venture capital deals and the dollar amount invested in early deals in the social media space. The number of deals peaks in 2014, the year of Facebook’s acquisition of WhatsApp, and the amount invested peaks shortly after, in 2016. The decline over time can be driven by many factors, including factors that are common to other software acquisitions (such as a change in financing conditions or economic outlook). To try to control for these other factors, in all the following analyses we will deflate all the numbers by the overall VC investment in the software sector during the same years. In Figure 2a, we plot the normalized relative amount invested in treated companies, around an acquisition event. For each acquisition, we identify as “treated” the startups with an 80% or higher Pitchbook similarity (see above) to the company acquired. For each of the 63 observation years [= (3 years before+ acquisition year + 3 years after)*9 acquisitions], we sum the investment across treated startups. To adjust for cyclicality, this sum is deflated by the total investment made that year by venture capitalists in the software sector (defined by Pitchbook as belonging to the industry sector ‘software’). This ratio, which we label relative investment, is expressed in percentage terms. Since each acquisition has a different number of comparable “treated” startups, we normalize the seven annual observations of relative investment for each acquisition by the relative investment in the year of the acquisition. This normalized relative investment is therefore 1 in the year of the acquisition for all acquisitions. Then, we average these ratios across the nine events using event time, as is commonly done in event studies. As we can see from Figure 2a, the normalized relative level of investment drops over 40 percent in the three years following an acquisition. As a comparison, we selected all software acquisitions (100% stake) other than those by Facebook or Google for more than 500M dollars between 2006 and 2016. There are 178 such acquisitions for which we have data. The software industry exhibits a strong downward trend of relative investment in the three years before an acquisition, a trend that is reversed in the three years after the acquisition, unlike the continued downtrend when a platform acquires. In Figure 2b, we plot the normalized relative number of startup investments. The pre-event trend decline in the relative number of deals is not surprising. In early stages, VC investment rounds are more frequent (Gompers, 1995). As firms mature, rounds become less frequent: hence a decline in the raw number of deals. The pre-event decline, however, accelerates substantially after a Facebook/Google acquisition, as Figure2b shows, in contrast to the normal acquisition in the software industry. While the