Startups are getting stuck into some highly-regulated industries — and they need to start taking those regulations seriously. Long gone are the days when founders could “move fast and break things”, to echo Mark Zuckerberg’s famous words. Now startups are handling people’s money; they’re responsible for children’s education; and some of them are even taking our lives in their (healthtech) hands.
But staying on the right side of regulation is not easy. Most rules were designed a long time ago, well before the internet came about and made it possible to solve old problems with new solutions. Many things that are now possible don’t exactly fit in the old regulatory boxes that we inherit from the past — whether it’s rules that relate to taxi medallions or the 1835 Highways Act that effectively prohibits anyone in the UK from riding an electric scooter on the road. For some startups to take off while strictly complying with existing regulations in sectors such as transportation, financial services or healthcare, the sequence would have to be: first, change the regulations, and second, grow the business.
In practice, however, many founders are so obsessed with moving forward that they are often oblivious to the fact that legacy regulations effectively stand in the way. Investors might be more clearsighted about the regulatory context, but they often assume that regulators go with the flow and upgrade their framework as it becomes obvious that new approaches are possible.
Break things anyway?
Alas, that is very rarely the case, which leaves founders with two equally difficult options. One is to move forward anyway, knowingly breaching the letter of the law and counting on a swift resolution once everyone, including regulators, realise that consumers love their product so much. The other option consists in first investing enough resources in lobbying regulators so as to obtain swift regulatory changes and thus allowing the business to move forward.
As they (usually) opt for the latter option, many entrepreneurs find themselves at a loss as to how exactly they should approach regulators and make them change their mind. Some borrow the old Uber and Airbnb playbook of organising their own community of users to make noise — and hopefully make elected officials realise that something has to give.
Another approach is to partner with other startups in the field, pay a lobbying agency and go through the hassle of meetings, hearings, white papers and other formalities — as startups such as Heetch, Kapten (which has since merged with Free Now) and SnapCar have long been doing in France to defend themselves against attacks from the taxi industry.
A third approach consists in recruiting high-profile advisors with clout in government circles, paying them with a mix of fees and equity, and counting on the fact that they’ll be able to convince their friend the minister, or their former colleague the chairman to make room for innovative models enabled by technology. Alas, as illustrated by the recent controversies about former British prime minister David Cameron lobbying for (now bankrupt) supply chain finance firm Greensill, such an approach can backfire, discrediting the very idea that regulators need to provide more leeway to innovative entrepreneurs.
If things go badly, you had one problem (regulatory issues) and now you’re ending up with two (regulatory issues and a PR issue).
When entrepreneurship collides with the brutal world of backroom politics, the risk is high that founders end up with more problems than they counted on. If things go badly, you had one problem (regulatory issues) and now you’re ending up with two (regulatory issues and a PR issue).
What such episodes reveal is that the startup world needs to up its game when it comes to lobbying regulators. And in the difficult game of upgrading regulations, everyone needs to play their part.
What needs to happen
First, founders need to embrace a less naive view of regulations and regulators. Too often, they don’t realise that many government officials are not that sensitive to the promises of technological progress. Rather, their focus is on maintaining order, creating jobs, appeasing various constituencies with conflicting interests — and, yes, winning the next election. Even worse, most founders tend to see the government as a giant bureaucratic mess that’s irrelevant at best and toxic at worst. It’s high time they learn to put themselves in regulators’ shoes and realise that the government’s bureaucracy can be turned into an ally if you engage with it properly and early enough.
Investors need to realise it’s up to them to do the heavy lifting.
Second, investors need to realise it’s up to them to do the heavy lifting. In the US, the most prominent VC firms have seen enough regulatory issues in their portfolios to decide that they need to have their founders’ backs. They do it by investing in thought leadership and engaging with prominent regulators, as Andreessen Horowitz has been doing for years through their media operation. In addition, they deploy enough capital in their portfolio companies so that they can hire as many lawyers, lobbyists and comms firms as needed to tackle the many regulatory challenges they’ll encounter along the way.
Do we have such investors in Europe? I certainly don’t see many yet, although we’re making progress with firms such as regulated markets-focused VC Form Ventures and campaigns such as #NotOptional, the Index Ventures-sponsored movement to update stock option regimes across Europe.
Government officials themselves need to wake up and remember that adapting regulations is a powerful lever from an industrial policy perspective.
Finally, government officials themselves need to wake up and remember that adapting regulations is a powerful lever from an industrial policy perspective. This one, by the way, is especially true in Europe. China has the sheer size of its domestic market. The US has the unrivalled power of a financial system able to funnel vast amounts of money into the startup world. What Europe has, in comparison, is powerful governments able to pull the regulatory lever as they see fit. Too often, they do so to protect legacy corporations by maintaining backward-looking regulations. Instead, they should seek to lower barriers to entry and make room for the new business models that technology now makes possible.
As long as governments act as foes for startups, any money allocated to dealing with regulators is likely to be wasted. But if government leaders decide to nudge their bureaucracy toward welcoming and supporting entrepreneurs, maybe everyone in the ecosystem — founders, investors, professionals — will finally be able to reap the rewards of their investment in lobbying for change. Hopefully they can get there without having to hire a former prime minister to help them.