Big tech may have stepped up during COVID-19, but we can’t let it gobble up startups

Margarete Vestager’s efforts to maintain competition in the EU tech market by reining in the giants could be about to get a lot more difficult. Before the Covid-19 pandemic, the global community was largely thriving, with a combination of rivalry from innovative companies and public distrust keeping digital monoliths honest.

The economic shock that followed has turned this on its head, with monumental ramifications for the startup community and the broader tech sector.

Despite Vestager’s efforts to manage their influence and restrict monopolies, we’ve seen a resurgence in the profile of Big Tech companies – mainly because society needs them. Whether by enabling the contact tracing apps that monitor the spread of the virus, facilitating remote working, battling disinformation or simply by keeping us entertained during lockdown, the pandemic has provided an opportunity for the world’s largest tech firms to prove how indispensable they are.

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Not only this, but they have used their influence for good, re-asserting themselves in a way that has dispelled some of the negativity that surrounded them just months ago.

Although concerns naturally remain that the legacy of coronavirus could be an increasingly digital world ruled by powerful monopolies – with our civil liberties most at risk – the balance of the broader tech sector could also suffer if the coming months are not handled appropriately.

While the likes of Amazon and Google have a crucial role to play in the tech ecosystem during ‘peacetime,’ in a crisis, we must ensure that their influence does not damage the industry.

Opportunity in the air

No one has escaped the impact of coronavirus, not even the small contingent that dominates the global tech sector. But others are suffering more – whether the bricks and mortar high street, travel companies, hospitality sector or early stage startups.

There’s been an abundance of campaigns and government-sponsored economic packages across Europe designed to support the small business and startup ecosystem. The significant oversubscription to the Future Fund in the UK highlights just how desperately this support is needed.

However, the struggles experienced by many early stage tech companies translate into opportunity for others. With valuations of startups falling, larger companies, whether the classic ‘Big Tech’ cohort or others, are potentially more likely to acquire them. Who can blame a struggling founder for wanting to cash out in the current economic climate if the opportunity presents itself?

After all, industry mainstays have better access to capital markets and significant cash reserves, making it far easier for them to weather the economic storm with confidence, and even make bolder moves to tighten their hold on the market.

This is happening across a range of industries but given the relatively small cluster of powerful companies that dominates the global tech sector, digital companies are arguably more susceptible to acquisition than those elsewhere.

Given their perennial influence, the US tech giants such as Google, Facebook, and Amazon are the prime candidates to search for strategic acquisitions at a cut price. However, with the outbreak easing off in Asia, it could be the leading state-backed entities in China that look to snap up innovative companies cheaply.

In fact, resistance to attempts by Canyon Bridge, the Chinese owners of British chip maker Imagination Technologies, to tighten their influence on the firm’s board, highlights the prevailing concerns about the risk of moving domestic IP overseas. Governments and industry bodies alike are keeping a close eye on the activities of tech giants or state-controlled outfits moving to strike.

A balancing act

With an economic downturn likely to continue for some time, how can we protect startups from the risk of takeover? For the UK, perhaps the Future Fund, which could eventually provide the UK government with equity stakes in the fast-growth companies it supports, could be a vehicle that helps to deter foreign state-backed investors from making moves.

Most founders do not want to sell a business and IP that she or he has worked so long to build from scratch. To resist the lure of a sizeable offer, they need immediate help.

While government support packages will be a key component of this, startups are at the mercy of what could be a cumbersome and oversubscribed distribution system. There are other ways of getting capital to cash-strapped companies when they need it most.

For example, expediting R&D tax credits and modifying the Enterprise Investment Scheme and Venture Capital Trust rules will allow investors to inject cash into startups right now.

It’s unclear whether coronavirus will accelerate the power of Big Tech or create the environment for new peers to step up and solve the societal issues accelerated by the pandemic. But the tech ecosystem is the sum of its parts – no matter how much we need the scale of the giants, we must be careful not to stifle the agile, innovative startups that are so essential for defining our direction as a sector.

Ultimately, we must strike a balance between encouraging the world’s largest tech companies to engage with the broader ecosystem – supporting, investing in and sometimes acquiring startups.

At the same time, the current circumstances could create a disproportionate focus on the latter, which cannot come at the expense of industry competition and innovation or sacrifice the maintenance of a healthy pipeline of high growth businesses.

Supporting startups so that they do not have to exit prematurely is the collective duty of the industry and government – we just cannot underestimate the urgency.