But some of their proposals could actually hurt the smaller companies they’re meant to protect, venture capitalists warned CNBC.
VCs are particularly concerned about efforts in Congress to restrict mergers and acquisitions by dominant platforms. Some of those proposals would work by shifting the burden of proof onto those firms in merger cases to show their deals would not harm competition.
While proponents argue such bills would prevent so-called killer acquisitions where big companies scoop up potential rivals before they can grow — Facebook’s $1 billion acquisition of Instagram is a common example — tech investors say they’re more concerned with how the bills could squash the buying market for start-ups and discourage further innovation.
Of course, venture capitalists and the groups that represent them have an interest in maintaining a relatively easy route to exiting their investments. A trade group representing VCs, the National Venture Capital Association, counts venture arms of several Big Tech firms among its members. (Comcast, the owner of CNBC parent company NBCUniversal, is also a member.)
But their concerns highlight how changes to antitrust law will have an impact far beyond the largest companies and how smaller players may have to adjust if they’re passed.
Why start-ups get acquired
When venture capitalists invest in a start-up, their goal is to make a large return on their spend. While most start-ups fail, VCs bank on the minority having large enough exits to justify their rest of their investments.
An exit can occur through one of two means: through an acquisition or by going public. When either of these events occurs, investors are able to recoup at least some of their money, and in the best case scenario, reap major windfalls.
About ten times as many start-ups exit through acquisitions as through going public, according to the NVCA. Venture capitalists say that number shows just how important it is to keep the merger path clear.
The top five tech firms aren’t the only ones scooping up tech deals. Amazon, Apple, Facebook, Google and Microsoft have accounted for about 4.5% of the value of all tech deals in the U.S. since 2010, according to public data compiled by Dealogic.
Reform advocates have pointed to some acquisitions, like that of Instagram by Facebook, as examples of companies selling before they have the chance to become standalone rivals to larger firms. But VCs say that’s often not the case.
“They all think they could be public companies one day, but the realities are, it’s not realistic for most of these companies to achieve the size and scale to survive the public markets as of today,” said Michael Brown, general partner at Battery Ventures.
While going public is a often the goal, VCs say it can be impractical for start-ups for various reasons.
First, some start-ups may simply not have a product or service that works long-term as a standalone business. That doesn’t mean their technology or talent isn’t valuable, but just means it could be most successful within a larger business.
Kate Mitchell, co-founder and partner at Scale Venture Partners, gave the example of a company called Pavilion Technologies that made predictive technology for manufacturers and agriculture, which sold to manufacturing company Rockwell Automation in 2007.
“That’s a company that just couldn’t get to escape velocity,” she said of Pavilion. “Because they were selling globally to large plants, we couldn’t figure out how to sell the technology cost effectively.”
It was still a useful technology, but needed the infrastructure of a larger business to accelerate further, she said. After Rockwell acquired it, it became incorporated into its offerings and several employees stayed for years.
Sometimes, she said, an acquisition is a last resort before bankruptcy, and at least helps investors get some of their money back.
“It is better that they’re sold for even 80 cents on the dollar than that they go bankrupt,” she said.
In addition, going public can be difficult. The IPO process is expensive and VCs said that small cap companies often struggle on the public market in part because of the lack of analyst coverage of such businesses.
Clate Mask, co-founder and CEO of venture-funded email marketing and sales platform Keap, said greater merger restrictions on the largest companies would likely “change the calculus” for start-ups. But the shift would not be between getting and acquired and going public. Instead, he said, it could make entrepreneurs think harder about whether to raise venture funding at all.
“When you have capital behind you, you can think and operate differently,” he said, adding that entrepreneurs can take more risks with that backing.
Loss of investment and innovation
Several VCs told CNBC they were worried about the trickle-down effect that merger restrictions on the largest firms would have on the entire entrepreneurial ecosystem.
Their fear is that if companies no longer have enough viable exit paths, institutional investors that back VCs — like endowments and pension funds — will shift their money elsewhere. In turn, VCs will have fewer funds to dole out to entrepreneurs, who may see less reason to take the risk of starting a new company.
The ultimate concern is for a loss of innovation, they say, which is exactly what lawmakers are hoping to fend off with merger restrictions on the largest buyers.
“If you restrict the potential to generate exciting rewards and returns from investment, entrepreneurs could find other things to do with their time,” said Patricia Nakache, general partner at Trinity Ventures.
Nakache said placing restrictions on the largest tech firms’ ability to make acquisitions could actually discourage entrepreneurs from building companies that compete with their core businesses. That’s because many entrepreneurs like having a back-up plan incorporating possible acquirers if they can’t go public. With greater uncertainty about whether the Big Tech companies could be potential buyers, they may seek to build businesses outside of the largest players’ core offerings, she said.
VCs also warned that without the biggest players in the mix, sale prices for start-ups would drop significantly.
But outside the industry, some believe these concerns won’t be as bad as VCs fear.
“These sorts of laws, if they work as intended, you’re going to have a more competitive marketplace generally, so there’s going to be more potential buyers,” said Michael Kades, director of markets and competition policy at the non-profit Washington Center for Equitable Growth. “I get it if you’re at the VC today, what you’re concerned about is the next couple of years or what your company can get, but increasing the number of potential buyers for firms … also means that there’s still a very thriving market for these sorts of acquisitions, just not by dominant firms.”
Bhaskar Chakravorti, dean of global business at Tufts University’s Fletcher School, said while venture capitalists are probably right that acquisition prices could slide under new merger restrictions, entrepreneurs will still have a drive to innovate.
“Ultimately people are going to adapt and yes, some of the valuations, some of the bidding may be stunted. Some of the acquisitions may go for ten, 20% less,” he said. “But ultimately, I don’t think it’s going to make that much of a difference because entrepreneurs are going to go after ideas, they’re going to build them, they’re going to put together teams, and venture money needs a place to invest.”
Kades agreed that good ideas will still likely get funding even if the largest firms can’t bid on them or would have a harder time completing an acquisition. Restricting mergers from those companies is about “trying to limit the anticompetitive premium,” he said.
VCs are also concerned the new rules could accelerate the shift of venture investment outside the U.S.
Mitchell said while other countries including Canada have been adding incentives for entrepreneurs to come and stay in their borders, regulations under consideration in the U.S. will push them away.
“We would be making it difficult just at a time when everyone else is trying to make it attractive” to be an entrepreneur in their country, she said.
According to the NVCA, the U.S. has seen its share of global venture capital fall from 84% to 52% in the last 15 years. That’s why lawmakers shouldn’t rest on their laurels that U.S. venture capital can keep up with the rest of the world under new arduous regulations, VCs contend.
But Chakravorti disagreed the merger laws would push investment outside the U.S., as many alternatives are worse.
“There are very few alternative locations,” he said. Exits in China would come with heightened scrutiny, and Europe is known for a more heavy-handed approach on business regulation.
Still, Brown said, should stricter merger laws pass, he would have to consider casting a wider net for potential buyers when it comes time to exit an investment. That could include more international buyers than he’d otherwise consider.
Nakache said should merger reforms pass, she may consider investing more heavily in start-ups whose potential acquirers wouldn’t be impacted by the laws. For example, if enterprise platforms like Salesforce or Oracle didn’t meet the threshold for stricter merger enforcement, VCs might shift spending from areas like search and social media to software as a service.
Open to some reforms
Some of the VCs interviewed by CNBC felt existing antitrust laws were adequate, but others acknowledged that reforms outside of mergers could be beneficial.
Restrictions on platforms leveraging data they collect to compete with businesses that rely on them is one example that could help level the playing field if done correctly, Nakache suggested.
Mitchell said the most helpful change would be to create more consistency in enforcement of the antitrust laws, particularly from one administration to the next.
Mask, the Keap CEO, said he’s not opposed to Congress taking some action to curb Big Tech companies’ power, but that most entrepreneurs recognize those firms overall “are good for the ecosystem.”
“Those Big Tech companies are helpful in driving a lot of the momentum of the overall sector,” he said. “And I think to have them broken up in some kind of extreme aggressive way I’m not sure is a great thing either.”
Nvidia briefly surpasses $2 trillion in market cap during intraday trading
Nvidia CEO Jensen Huang speaks onstage during The New York Times Dealbook Summit 2023 at Jazz at Lincoln Center in New York City on Nov. 29, 2023.
Slaven Vlasic | Getty Images
After rising earlier in the day, shares of Nvidia were down about 1% at 11 a.m. ET. Nvidia stock closed up 16% Thursday.
Nvidia posted $22.10 billion in revenue for its fiscal fourth quarter, a 265% increase from a year ago and above the $20.62 billion expected by analysts polled by LSEG, formerly known as Refinitiv. Nvidia reported $12.29 billion in net income during the quarter, up a staggering 769% from $1.41 billion last year.
The company has benefited from the tech sector’s insatiable demand for artificial intelligence capabilities over the past year. Nvidia makes the pricey graphics processors for the servers that power large AI models.
Nvidia said it expects $24.0 billion in sales in the current quarter, surpassing the $22.17 billion expected by analysts.
“Fundamentally, the conditions are excellent for continued growth,” Nvidia CEO Jensen Huang said during the company’s quarterly call with investors Wednesday.
— CNBC’s Kif Leswing contributed to this report.
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AI can ‘disproportionately’ help defend against cybersecurity threats, Google CEO Sundar Pichai says
Google CEO Sundar Pichai speaks in conversation with Emily Chang during the APEC CEO Summit at Moscone West on November 16, 2023 in San Francisco, California. The APEC summit is being held in San Francisco and runs through November 17.
Justin Sullivan | Getty Images News | Getty Images
Munich, GERMANY — Rapid developments in artificial intelligence could help strengthen defenses against security threats in cyber space, according to Google CEO Sundar Pichai.
Amid growing concerns about the potentially nefarious uses of AI, Pichai said that the intelligence tools could help governments and companies speed up the detection of — and response to — threats from hostile actors.
“We are right to be worried about the impact on cybersecurity. But AI, I think actually, counterintuitively, strengthens our defense on cybersecurity,” Pichai told delegates at Munich Security Conference at the end of last week.
Cybersecurity attacks have been growing in volume and sophistication as malicious actors increasingly use them as a way to exert power and extort money.
Cyberattacks cost the global economy an estimated $8 trillion in 2023 — a sum that is set to rise to $10.5 trillion by 2025, according to cyber research firm Cybersecurity Ventures.
A January report from Britain’s National Cyber Security Centre — part of GCHQ, the country’s intelligence agency — said that AI would only increase those threats, lowering the barriers to entry for cyber hackers and enabling more malicious cyber activity, including ransomware attacks.
“AI disproportionately helps the people defending because you’re getting a tool which can impact it at scale.
CEO at Google
However, Pichai said that AI was also lowering the time needed for defenders to detect attacks and react against them. He said this would reduce what’s known as a the defenders’ dilemma, whereby cyberhackers have to be successful just once to a system whereas a defender has to be successful every time in order to protect it.
“AI disproportionately helps the people defending because you’re getting a tool which can impact it at scale versus the people who are trying to exploit,” he said.
“So, in some ways, we are winning the race,” he added.
Google last week announced a new initiative offering AI tools and infrastructure investments designed to boost online security. A free, open-source tool dubbed Magika aims to help users detect malware — malicious software — the company said in a statement, while a white paper proposes measures and research and creates guardrails around AI.
Pichai said the tools were already being put to use in the company’s products, such as Google Chrome and Gmail, as well as its internal systems.
“AI is at a definitive crossroads — one where policymakers, security professionals and civil society have the chance to finally tilt the cybersecurity balance from attackers to cyber defenders.
The release coincided with the signing of a pact by major companies at MSC to take “reasonable precautions” to prevent AI tools from being used to disrupt democratic votes in 2024’s bumper election year and beyond.
Adobe, Amazon, Google, IBM, Meta, Microsoft, OpenAI, TikTok and X, formerly Twitter, were among the signatories to the new agreement, which includes a framework for how companies must respond to AI-generated “deepfakes” designed to deceive voters.
It comes as the internet becomes an increasingly important sphere of influence for both individuals and state-backed malicious actors.
Former U.S. Secretary of State Hillary Clinton on Saturday described cyberspace as “a new battlefield.”
“The technology arms race has just gone up another notch with generative AI,” she said in Munich.
“If you can run a little bit faster than your adversary, you’re going to do better. That’s what AI is really giving us defensively.
president of security at DXC
A report published last week by Microsoft found that state-backed hackers from Russia, China, and Iran have been using its OpenAI large language model (LLM) to enhance their efforts to trick targets.
Russian military intelligence, Iran’s Revolutionary Guard, and the Chinese and North Korean governments were all said to have relied on the tools.
Mark Hughes, president of security at IT services and consulting firm DXC, told CNBC that bad actors were increasingly relying on a ChatGPT-inspired hacking tool called WormGPT to conduct tasks like reverse engineering code.
However, he said that he was also seeing “significant gains” from similar tools which help engineers to detect and reserve engineer attacks at speed.
“It gives us the ability to speed up,” Hughes said last week. “Most of the time in cyber, what you have is the time that the attackers have in advantage against you. That’s often the case in any conflict situation.
“If you can run a little bit faster than your adversary, you’re going to do better. That’s what AI is really giving us defensively at the moment,” he added.
Ride-hailing giant Grab posts first profitable quarter, announces $500 million share buyback
A attendee walks past a banner with a Grab logo before a bell-ringing ceremony as Grab begins trading on the Nasdaq, in Singapore, on Thursday, Dec. 2, 2021.
Ore Huiying | Bloomberg | Getty Images
This compares with a $391 million loss recorded in the same period a year ago. The boost was “primarily due to the improvement in Group adjusted EBITDA, fair value changes in investments, and lowered share-based compensation expenses,” the company said.
Revenue for the quarter hit $653 million, exceeding LSEG analysts’ estimates of $634.86 million.
Losses for full year 2023 came to $485 million, down 72% from $1.74 billion a year ago.
In addition to ride-hailing, the company also provides financial services like payments and insurance, as well as deliveries for food, groceries and packages.
“We exited [2023 with] mobility exceeding pre-Covid levels. We are seeing a very strong demand in the mobility space,” Grab CFO Peter Oey told CNBC in an exclusive interview on Friday, adding that tourism is “growing very much.”
“If you look at the deliveries business, we have another record 13% year-over-year growth. We have now more users on our platform also at the same time. So we have really strong momentum,” he said on CNBC’s “Squawk Box Asia.”
Grab announced Thursday it would be repurchasing up to $500 million worth of class A ordinary shares for the first time.
Grab was largely unprofitable during its years of operation, having amassed billions of dollars in losses since its inception in 2012.
In the initial years of business, tech startups tend to prioritize growth over profitability, which usually means burning a lot of cash. But with global macro uncertainties slowing growth, they have been forced to renew their focus on profitability and be more prudent with costs.
During the fourth quarter, total incentives — which include partner and consumer incentives — were further reduced to 7.3% of total value of goods sold, Grab said in its report. That’s compared to 8.2% in the same period a year ago “as we continued to improve the health of our marketplace.”
Grab had been doling out incentives to attract drivers and passengers to its platform but that’s tapering now as the company moves to drive up profitability.
On whether Grab would reach a time where it wouldn’t need to incentivize people to stay on the platform, Oey said incentives will “always be a lever” for the business.
“I don’t think we’re going to see a world where there’s no incentive whatsoever,” he told CNBC, adding that incentives help “to make sure we have enough supply” of drivers and attract price-sensitive customers.
For 2024, Grab expects revenue to come in between $2.70 billion and $2.75 billion, lower than LSEG analysts’ consensus of $2.8 billion.
Grab’s shares closed 8.41% lower on Thursday. Its share price has plummeted 75.8% from its $13.06 opening price in December 2021, when the firm first listed on the Nasdaq.
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