Investing involves assessing risks and possible rewards.
Venture capitalists this week were alerted to a risk many may not have been seriously considering. But that risk may now affect future investments, valuations, and even the viability of particular startups.
The risk came in the form of an unexpected move by the Federal Trade Commission. On Monday, the FTC sued to block on antitrust grounds the acquisition of Harry’s, the venture-backed shaving products company, by Edgewell Personal Care, makers of Schick razors.
In recent decades, federal antitrust authorities have rarely stepped in to block mergers. When they have, the deals have usually involved consolidation among giant corporations, not large companies buying much smaller competitors. The FTC’s move against the Harry’s deal may indicate antitrust authorities will no longer rubber stamp those latter kinds of deals.
“The FTC is now an identifiable risk,” said Greg Bohlen, managing partner of Union Grove Venture Partners. He continued: “This is kind of a wakeup call.”
Edgewell was trying to follow in Unilever’s footsteps
Edgewell announced its intention to buy Harry’s last May for $1.4 billion in a cash-and-stock deal. As part of the acquisition, Andy Katz-Mayfield and Jeff Raider, Harry’s cofounders and co-CEOs, were expected to join Edgewell’s executive team.
Harry’s had previously raised some $475 million in venture funding through four standard rounds and a seed round from investors including Tiger Global Management, SV Angel, and Bullish, which also backed Peloton. The company, along with Dollar Shave Club, had helped to shake up the shaving industry by offering shaving kits online and selling razors at a discount to those of Schick and Procter & Gamble’s Gillette.
Consumer products giant Unilever acquired Dollar Shave Club for $1 billion in 2016. Given that precedent, it initially looked like Edgewell’s deal would sail through too.
But instead, the FTC stepped in. Harry’s has added much needed competition to a market that had long been a duopoly market, the FTC said in its statement announcing its move.
“The proposed combination would eliminate one of the most important competitive forces in the shaving industry,” the agency said in the statement.
Harry offers shaving kits and products through its website and in Target stores.
The FTC’s move ‘surprised’ venture investors
While pretty much all deals are subject to regulatory review, venture investors who spoke with Business Insider said they were shocked that it moved against the Harry’s deal.
“I was very surprised,” said Charlie Plauche, a partner with Austin, Texas-based S3 Ventures. “I was in disbelief when I saw that headline.”
Part of what shocked Plauche is that Harry’s appears to be losing money and Schick has seen its market share and sales decline in recent years. A combination of the Edgewell and Harry’s would present a more formidable competitor to market leader Gillette, he said.
“Clearly, they … are buying Harry’s to combat their loss of sales and to continue to compete with Procter & Gamble,” Plauche said. “It’s crazy to me the FTC would block that.”
Regardless of the justification for the FTC’s move, it has increased uncertainty about how the agency will act in the future, he said. And that’s likely to affect investments, forcing venture capitalists to start factoring in antitrust considerations, if they weren’t already, he and other investors said.
Investors who are mostly likely to be alarmed by the FTC’s move are those who focus on later-stage startups, startups in the consumer-packaged goods industry, or upstarts in highly consolidated industries, they said.
“I think there will definitely be an effect on investing, especially if this continues to happen,” Plauche said.
Venture investors worry the move will affect valuations and exits
Some startups could see their valuations cut or not get the kind of valuation they were expecting in their next fund raising round as venture capitalists factor in the antitrust risk, the investors said. The FTC’s move could also affect the long-term future of some startups, they said. In some cases, certain startups may not be viable as standalone businesses and may have to shut down if they can’t sell to competitors in their space, particularly if those are the only companies interested in acquiring them, the investors warned.
The FTC’s move against the Harry’s acquisition seems to be of a piece with what seems to be a growing backlash against tech and tech-related companies, Bohlen said.
“Real or not, [that backlash] does affect valuations,” he said. “It does affect how fast companies can grow. It does affect final outcomes of companies.”
To be sure, not everyone was shocked by the FTC’s move. Antitrust regulators around the world have become increasingly active in recent years, particularly in the tech sector. European authorities have levied a series of billion dollar fines against Alphabet for thwarting competition. UK competition officials have moved to pause Amazon’s planned investment in delivery startup Deliveroo while they consider antitrust concerns in the arrangement. And US state and federal regulators have opened up antitrust probes into Amazon, Alphabet, Facebook, and Apple.
Startups have other exit options
Malcolm Thorne spent 20 years working in the automotive industry, the various sectors of which have long been dominated in the US by a handful of companies each. Because of that experience, antitrust concerns are always in his mind when making investments, he said. Investors have to consider when they buy stakes in companies what their exits will be, particularly if the expected end game for the startup is that it will be acquired.
“There’s higher risk of government intervention where there’s a very limited number of players,” said Thorne, a venture partner with Madison, Wisconsin-based 4490 Ventures. “I would look more carefully there.”
There’s a risk that the government’s move could affect valuations and acquisitions in markets that are particularly concentrated markets, especially if an upstart company is more valuable to one of the established players in that industry than to anyone else, Thorne said. But in most cases, startups and their backers are likely to find plenty of other potential buyers, even if the government bars them from selling to one of their rivals, he said.
One set of potential acquirers are corporations that aren’t yet in the particular market in which the startup is operating but are in related ones, Thorne said. That’s just what happened when Unilever, which previously wasn’t a participant in the shaving wars, bought Dollar Shave Club. Another set of potential acquirers are private equity firms, which have had increasing amounts of capital at their disposal and have become increasingly active in buying up startups, he said.
Just because a startup is barred from selling to one of its competitors, “doesn’t mean you can’t exit,” Thorne said.
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Investing involves assessing risks and possible rewards.