The new tech watchdog will have its powers to block takeovers by Silicon Valley giants curbed after ministers bowed to pressure from the likes of Google and Facebook.
Ministers are drawing up plans to soften a clampdown on tech acquisitions under the Digital Markets Unit after concerns it would stifle investment in UK startups, according to Whitehall sources.
The unit within the Competition and Markets Authority was set up to rein in Silicon Valley giants, including powers to more easily intervene in takeovers by large tech firms with “strategic market status”.
However, experts warned the startup scene would be badly damaged by the proposals that would all but ban big tech firms from making deals by judging them under a new stricter standard.
Whitehall sources said the powers to block takeovers will be reined in significantly in a major victory for Silicon Valley and startups.
“The new mergers control regime that was being proposed is not going to be taken forward,” said one source. “It is the one thing that needed amending and was preventing something that otherwise is really great and really impactful.”
The Digital Markets Unit had sparked opposition from both early-stage startups and Big Tech, including Google and Facebook. It had been hoped legislation to equip the unit with the new powers would be introduced this year following consultations.
Startups have warned the original proposals threatened to damage investment as it could block a lucrative exit route out of stakes in innovative startups.
Sam Dumitriu, research director at the Entrepreneurs Network, said: “Startup formation and venture capital investment is extremely sensitive to the availability of exits. If the possibility of exiting via Big Tech acquisition was removed, it'd give founders fewer options and make starting a tech business riskier.”
He warned that the proposals would mean “fewer high-growth tech businesses starting in the UK and a tougher investment environment for those who remain".
A poll by startups industry group Coadec found that 90pc of investors think the ability to be acquired is “very important to the success of the tech startup ecosystem”. Half warned that curbs restricting exits from startups would “significantly reduce investment”.
Coadec estimates that the Digital Markets Unit plans could cause a £2.2bn drop in venture capital as countries with more liberal takeover rules enjoy stronger investment.
It said in a report last year that lowering the bar for intervention in tech takeovers “threatens the foundations of the tech ecosystem”.