Upgrade to Pro — share decks privately, control downloads, hide ads and more …

Emerging Companies & Regulatory Risk

Joe Vladeck
January 06, 2015

Emerging Companies & Regulatory Risk

I gave a talk at InSITE Connect in DC about how emerging companies, and their backers, should think about and mitigate regulatory risks.

Joe Vladeck

January 06, 2015
Tweet

Other Decks in Research

Transcript

  1.     1. REGULATORY RISKS SCARE VCS AND ENTREPRENEURS� BASIC

    PREMISE� First, while entrepreneurs and VCs are great at dealing with technological, market, and operational risks, they are poorly equipped to to assess and mitigate regulatory and legal risks. There are a lot of interesting reasons why this is the case, but that’s beyond our scope here. �
  2.     2. WE’VE JUST PASSED AN INFLECTION POINT� BASIC

    PREMISE� This is important, because we’ve passed an inflection point. The last generation of great startups – the Facebooks, Googles, and Amazons – disrupted among the least regulated facets of the American economy: how we communicate with each other, and how we buy stuff.�
  3.     2. WE’VE JUST PASSED AN INFLECTION POINT� BASIC

    PREMISE� This is important, because we’ve passed an inflection point. The last generation of great startups – the Facebooks, Googles, and Amazons – disrupted among the least regulated facets of the American economy: how we communicate with each other, and how we buy stuff.�
  4.     2. WE’VE JUST PASSED AN INFLECTION POINT� BASIC

    PREMISE� This is important, because we’ve passed an inflection point. The last generation of great startups – the Facebooks, Googles, and Amazons – disrupted among the least regulated facets of the American economy: how we communicate with each other, and how we buy stuff.�
  5.     2. WE’VE JUST PASSED AN INFLECTION POINT� BASIC

    PREMISE� This is important, because we’ve passed an inflection point. The last generation of great startups – the Facebooks, Googles, and Amazons – disrupted among the least regulated facets of the American economy: how we communicate with each other, and how we buy stuff.�
  6.     2. WE’VE JUST PASSED AN INFLECTION POINT� BASIC

    PREMISE� The next generation of disruptive startups – the Airbnbs and Ubers, the personalized genomics companies, the bitcoin-based financial services companies – are going to come in industries that are highly regulated.�
  7.     2. WE’VE JUST PASSED AN INFLECTION POINT� BASIC

    PREMISE� The next generation of disruptive startups – the Airbnbs and Ubers, the personalized genomics companies, the bitcoin-based financial services companies – are going to come in industries that are highly regulated.�
  8.     2. WE’VE JUST PASSED AN INFLECTION POINT� BASIC

    PREMISE� The next generation of disruptive startups – the Airbnbs and Ubers, the personalized genomics companies, the bitcoin-based financial services companies – are going to come in industries that are highly regulated.�
  9.     3. VCs NEED A BETTER REGULATORY TOOLKIK� BASIC

    PREMISE� Putting 1. and 2. together, it becomes clear that VCs and entrepreneurs need better tools to deal with regulatory and legal risks. Those tools are the focus of the rest of this talk.�
  10.     Let’s talk about regulatory risks. First, there are

    a set of companies that are using the internet to bring new assets into existing markets. There was a market for cabs before Uber, for example. � SCOPE� S E V E R I T Y� NEW ASSETS � TO MARKET�
  11.     These sharing-economy companies face an incredibly broad set

    of threats because they are regulated differently in every jurisdiction where they operate. But, no one jurisdiction’s regulators can seriously jeopardize the company’s long-term prospects. Uber can’t operate in Portland, Oregon, but it’s doing fine. � SCOPE� S E V E R I T Y� NEW ASSETS � TO MARKET�
  12.     Conversely, there’s a set of companies that are

    bringing new technologies to market, potentially even creating new markets. These companies are typically regulated at the federal level, and while their legal and regulatory questions might be acute, they’re the type of threats that can put the company out of business. � SCOPE� S E V E R I T Y� NEW ASSETS � TO MARKET� NEW TECH� TO MARKET�
  13.     Aereo, a cloud-based telecom startup, is a great

    example here. Aereo raised $100M at an $800 million valuation to declaring bankruptcy basically overnight after it lost a key copyright case in the Supreme Court.� SCOPE� S E V E R I T Y� NEW ASSETS � TO MARKET� NEW TECH� TO MARKET�
  14.     And last, we have a smaller subset of

    companies where the legal and regulatory landscape is totally unsettled. Companies in the Bitcoin space are a great example – there are lots of risks, and all of the risks are severe. � SCOPE� S E V E R I T Y� NEW ASSETS � TO MARKET� NEW TECH� TO MARKET� NEW...� EVERYTHING�
  15.     SOLUTIONS� Solving these regulatory challenges requires different strategies

    based on the nature of the regulatory threat that a given company, or industry, faces. �
  16.     For companies with broad but shallow regulatory risks,

    a few solutions come to mind. � SCOPE� S E V E R I T Y� NEW ASSETS � TO MARKET�
  17.     LOBBYING� Here, lobbying is the obvious answer, but

    we’re in DC, and lobbying is boring, so I’m not going to say much except to point out that Uber has done a great job generating grassroots support in local political matters.�
  18.     LEGAL PROCESS OUTSOURCING� More interesting is what Shake

    Law is doing – developing a legal platform for “1099 economy” companies to manage relationships with independent contractors, in order to reduce the risk of violating local and federal labor laws. InSITE alum Vinay Jain is Shake Law’s chief legal officer, btw.�
  19.     COLLECTIVE INSURANCE� And where regulatory regimes are developing

    at different paces in different jurisdictions, a collective insurance fund would ensure that no given entrepreneur has to bear potentially crushing liability for violations of an unclear or otherwise unenforced regulatory regime.�
  20.     Companies that face highly acute legal or regulatory

    risks need a different set of solutions to there problems. � SCOPE� S E V E R I T Y� NEW TECH� TO MARKET�
  21.     FINANCIAL MARKETS� To me, the most interesting solution

    here involves the financial markets. You can think about venture capital as a way of using finance to spread the technological, market, and operational risks that startups face. �
  22.     FINANCIAL MARKETS� Increasingly, the market is providing opportunities

    to finance legal risks; a number of litigation finance firms have launched recently. VCs could use these products as a hedging strategy when investing in a startup like Aereo (which was inevitably going to get sued by the major cable companies...).�
  23.     NEW VALUATION MODELS� More prosaically, I think VCs

    need better tools to explicitly value the cost of regulatory risk, and in particular, hybrid options valuation models are well suited to model the type of acute threats that regulators pose. �
  24.     NEW VALUATION MODELS� I’ll spare you the details

    on how this works, but follow up if you’re interested and we can talk more about the details.�
  25.     BETTER LEGISLATIVE INSIGHT� But I will add that

    in order to explicitly model the costs of legal or regulatory risk, you need to have a sense of what the likely outcomes are. There are a couple cool startups that are taking a big-data approach to legislation and regulation.�
  26.     BETTER LEGISLATIVE INSIGHT� FiscalNote, for example, is developing

    predictive tools to generate insights into whether certain legislation is likely to pass, and it’s working on a regulatory forecasting engine as well.�
  27.     Lastly, for companies where the legal or regulatory

    landscape is totally unsettled, time is essential – the democratic and regulatory processes just need to play out. � SCOPE� S E V E R I T Y� NEW...� EVERYTHING�
  28.     “SANDBOXES”� That said, I want to highlight an

    interesting idea here came from the newest FCC commissioner, Jessica Rosenworcel, who borrowed a software programming term. Commissioner Rosenworcel’s proposal suggests that federal regulatory agencies carve out areas where the typical regulatory regimes don’t apply.�
  29.     “SANDBOXES”� This would give innovators room to test

    out disruptive ideas that otherwise might be illegal, even though they’re not necessarily harmful and might yield net benefits. This would be a big step for risk-averse federal regulators, but it’s still a good idea.�
  30.     “SANDBOXES”� Rosenworcel’s idea is conceptually similar to the

    idea that “states are the laboratories of democracy” – that four states, to give one example, can legalize self-driving cars, and the other 46 states get to watch and see what happens in California, Neva. �
  31.     “I ALWAYS PREFER TO TAKE ON TECHNOLOGICAL RISK

    THAN POLICY RISK”� JOHN DOERR� KLEINER PERKINS�
  32.     “THE CONVENTIONAL SILICON VALLEY WISDOM IS TO STEER

    WELL CLEAR OF REGULATORY RISK”� JOSH HANNA� MATRIX PARTNERS�
  33.     EARLY INTERNET COMPANIES DISRUPTED “AMONG THE LEAST REGULATED

    ACTIVITIES IN AMERICAN LIFE”� RON KLAIN� REVOLUTION�