Running from Regulation

I am afraid that my industry is going to be regulated soon, as Congress is starting to hold hearings. How can I fight against this?

The short answer to your exact question is to hire the best lobbyists and regulatory lawyers to gear up for the battle, but I want to step back and ask you to ponder your business strategy, as you may have it backwards. Do not try to kill the process, as you cannot, but participate in it.

Technology creates new businesses, new industries, and new practices that could not have been foreseen decades, or even a few years, ago. Some of these changes feel out of control, if not abusive, to consumers and regulators, which creates a backlash and the desire to restrict, if not punish. As I have said before, no one likes the smartest kid in class, and that is the position of many who create the future.

It is important to realize that innovators do sometimes engage in abusive practices, like any other business leaders or people with power. For anyone who has read in detail some of the Department of Justice, state attorney general, or European regulatory complaints against Microsoft, Google, and Facebook over the years, it is shocking how far many otherwise good companies lose their compass, becoming their own worst enemies.

The general attitude of Silicon Valley is “the emperor is far away and walls are high. Let’s keep it that way.” I think that is an underperforming strategy. When a new industry springs to life, the pioneers have the opportunity to assist regulatory and legislative bodies in understanding it and putting on the safety rails that protect the industry from itself. Why would you want to participate instead of fight it?

First, engagement minimizes the chances of truly abysmal regulations and laws, as laws are likely to happen eventually, with or without you. Many regulators and legislators can barely use an iPhone. Do you want them figuring out your industry without a sherpa? If you make it simple and take seriously the task of explaining the implications and workings of your business to the key staffers, you minimize the risk they inadvertently kill your industry, out of ignorance or even spite for your hostility.

Second, regulation often protects early pioneers from disruption, which is good if you are one of the early dominant companies. The net effect of many proposed legal changes is to make it harder for newer startups to compete, as compliance, safety, transparency, and security cost money and time. By setting the bar higher, incumbents place barriers in the path of others who seek to displace them. By the way, in any situation where you are dealing with governments, you want the rules written around what you do, which includes government contracts and RFPs, which is why you always lobby behind the scenes for them to be written to your specifications.

Third, regulatory compliance often makes your industry palatable to major markets, like financial institutions, governments, multinationals, and multi-billion dollar investment funds. Regulatory risk creates uncertainty, as it could go awry. “Wild West” business environments make boards and large institutional investors nervous. Accepting a regulatory scheme that is rational makes you a safer and more predictable business partner and investment, as much of the risk is reduced. You also distinguish yourself from your competitors who seem less mature and reckless.

Finally, if you do not participate in the process, one of your competitors will. While you bemoan the injustice of the emperor’s new decree, they are the ones behind the wall safely, having pulled the ladder up behind themselves.

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