Today’s Startups Are Tomorrow’s Incumbents: What That Means for Regulatory Environments

I believe regulations lag innovation and are often employed by entrenched entities to preserve their dominant position. Immoral? Maybe, but from an economic standpoint it’s entirely rational. Similarly, startups using new models or new technology often have to function in a grey area. Either the laws are unclear because they never anticipated the innovations or complying with the regulations are functionally burdensome prior to understanding exactly what your business looks like and whether it’s sustainable.

Copyright, crypto currency, sharing economy – these are all areas where startups have come under criticism for controversial approaches. The largest startups in these industries – or maybe lets call them insurgents since many are now worth billions of dollars – have started to engage with local, state and federal politicians to help constructively find a new set of guidelines. This is productive. Laws don’t just protect incumbents, they also protect customers, employees and our tax base.

During these negotiations and rewrites we need to be careful to not unintentionally (or intentionally) create the next set of barriers to innovation. For example, imagine the leading ride share companies come to agreements that require large capital expenditures in order to be certified. They can likely afford this given revenue trajectory and large fundraises but a new entrant in the space would not be in the same position. And no VC wants to fund that sort of expense in early rounds, prior to knowing whether or not the business itself can succeed. This is why I largely agree with Fred Wilson’s post about safe harbors being critical for innovation. We need to make sure that not only can new models become law, but that those laws support further experimentation.