The Effect of Antitrust Enforcement on Venture Capital Investments

This paper studies the effect of antitrust enforcement on venture capital (VC) investments and VC-backed companies. To establish causality, I exploit the DOJ's decision to close several antitrust field offices in 2013, which reduced the antitrust enforcement in areas near the closed offices. I find that the reduction in antitrust enforcement causes a significant decrease in VC investments in startups located in the affected areas. Furthermore, these affected VC-backed startups exhibit a reduced likelihood of successful exits and diminished innovation performance. These negative results are mainly driven by startups in concentrated industries, where incumbents tend to engage in anticompetitive behaviors more frequently. To mitigate the adverse effect, startups should innovate more to differentiate their products. This paper sheds light on the importance of local antitrust enforcement in fostering competition and innovation.