The Rise of Regulatory Affairs in Innovative Startups

A few years ago, signs of change started to appear in the startup world. Media headlines began reporting battles between regulators and Uber and Airbnb. Sharing economy companies faced worker classification issues, and fintech companies bumped up against securities regulation, lending laws, and licensing requirements. Former politicians and government aides joined startup boards. A top-tier venture capital firm created the first policy and regulatory affairs group to help its portfolio companies navigate laws affecting their businesses and foster contacts with policy makers, regulators, and investors.

In a forthcoming book chapter, available here, I describe the increasing importance of regulatory affairs for many startup companies and examine the interesting implications of this development. I start with a question: What explains the growing number of regulatory collisions and collaborations between law and entrepreneurs?

Several developments seem to have contributed to this trend. First, we are not in the 1990s “dotcom” era, when innovators were pioneering a virtual world. Now, decades later, with mature technology and widespread internet connectivity, massive potential exists for new business models and consumer experiences to disrupt legacy industries in the physical world. Industrial-era structures and institutions are situated in webs of regulations.

Further, a generation of engineers has grown up “hacking” problems and pursuing “permissionless innovation,” which has fostered a willingness to create technology that challenges existing legal frameworks. Culture is an important contributor.

In addition, technology leaders have demonstrated increasing political engagement, normalizing this activity in an industry not previously known for it. And, a final contributing factor is that changing markets and regulations have helped startups raise millions, even billions, of dollars that can fund efforts to change laws, engage experts, and battle incumbents and regulators who stand in their way. That startups are staying private longer, on average, and that some are reaching huge valuations may also mean that startups are attracting more government attention and scrutiny than in the past.

The chapter also examines how the startup community has responded to these developments by creating new opportunities for individuals with government and policy expertise and connections. Regulatory affairs is a new core competency for startups and they are bringing in employees, directors, investors, lobbyists, and political consultants to help.

The last part of the chapter takes up one of the fascinating implications of startups colliding with regulations and having the expertise to navigate politics and policy: Legal change is not as simple as sometimes portrayed. Significant private and public collaboration is taking place in the governance of innovative technology.

Lawmakers are in conversation with technologists and are concerned about making room for innovation to flourish. Entrepreneurs have found ways to have a seat at the policy table. Some jurisdictions such as the UK and Australia have even established “regulatory sandboxes,” which provide a set of rules for innovators to test their products, services, or business models under a financial regulator’s supervision and with a set of defined exemptions or waivers. These developments raise a multitude of issues, including whether the story of law lagging behind technology might be worth re-examining.

This post comes to us from Professor Elizabeth Pollman at Loyola Law School, Los Angeles. It is based on her recent book chapter, “The Rise of Regulatory Affairs in Innovative Startups,” forthcoming in the Handbook of Law and Entrepreneurship in the United States (D. Gordon Smith and Christine Hurt, eds., Cambridge University Press) and available here.

 

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