Ask For Permission Or Beg For Forgiveness? A Primer For Startups Dealing With Regulators
This is how my initial conversation with a founder or CEO of a startup in a regulated industry typically goes.
Me: “You guys are potentially regulated by x, y and z. They may not like what you’re contemplating. How do you plan on dealing with that?”
Them: “Well, we’ll just do what TK did, right? We’ll do what we need to do for our business and work it out with the regulators later. Worked for Uber, should work for us.”
Me: (shifting uncomfortably in my seat, wondering why they’re referring to Travis as TK if they don’t really know him): “Maybe.”
Every startup in a regulated industry at some point faces the question of how to proceed when something they want to do might be looked upon unfavorably by a regulator or a politician. There’s no blanket answer on whether it makes more sense to just move forward anyway and deal with the fallout (begging for forgiveness) or to work proactively with the regulators and electeds before launching (asking for permission). It depends on the activity you’re considering, the jurisdiction, the laws on the books, the entrenched interests in the space, and a number of other factors.
Here’s a primer on how to best evaluate how each factor impacts you:
Can you count on outside support? Uber’s historical approach to regulation works because of a very unique context: they are disrupting an awful incumbent (taxi) who has treated everyone poorly for decades, refused to innovate or improve, and whose only support comes from making political contributions. At the same time, Uber offers a strong, reliable product that people like and frequently use. The threat of losing that product motivates people to advocate on Uber’s behalf to regulators and politicians.
But that juxtaposition is somewhat unique. So before assuming you can do the same, ask yourself: are my customers truly passionate about my product/service? Do they care enough to take the time to speak up on my behalf? Do I have enough scale to change the political dynamic if my customers are willing to support me? If the answers to those questions is yes, score one for begging for forgiveness. But it’s important to be very objective when figuring this out – most people aren’t that passionate about most products and services.
Do you like to fight? There’s no right answer to this question, it’s just a matter of knowing yourself well. Some people love conflict, they’re comfortable with controversy, and they’re happy to take on all comers. Some people think conflict is a bad use of their time and energy and would rather find a way to compromise. Once you decide to move ahead without permission, you need to be ready to not only engage in the fight but stick to your guns (if you fold easily, then no one will fear you and your opponents are going to walk all over you).
Who are you begging for forgiveness? Not every law and regulation was created equally. Potentially violating a consumer notification rule is very different from putting someone’s life at risk. If you know that the downside of violating a particular regulation is a scolding, that’s one thing. If it’s a criminal offense, that’s another. In other words, begging a bureaucrat for forgiveness isn’t so bad. Begging a prosecutor for forgiveness can be very bad.
How will the press cover the fight? The bigger your launch and the more upset the regulator or politician becomes, the bigger the story and the more pervasive the coverage. That can be a good thing or a bad thing, depending on how it plays. Knowing that you can explain why the current regulations hurts consumers or hinders progress on a tangible quality of life issue or kills new jobs is critical – if your only argument is that what you’re doing is good for you and your investors, you’re not going to generate a lot of sympathy. If you can effectively point to a larger public policy benefit, then you’re immediately putting the regulators on the defensive (they care about their own press coverage and whoever appointed them really cares). But if you know that there’s little you can say that will appeal to reporters, pundits, columnists, bloggers and editorial boards, your odds of winning the fight go way down.
How effective is the opposition? Unless you’re Google or Facebook, your idea is likely an improvement on something that currently exists. In my experience, when you start taking away someone’s market share, no matter how much they deserve it, they don’t tend to say “thank you” and wish you well. They use whatever channels they have to slow you down. That could be generating opposition and roadblocks from regulators and administrators. It could mean planting bad stories in the local media. It could mean getting a City Councilmember or a state legislator to hold hearings or introduce a bill that penalizes your business model. It could mean getting a union or a community group to publicly attack you. Some entrenched interests are sophisticated, smart and effective. Some are not. That’s why you need to know how good they are and what you’re likely to face before you decide to spurn the normal regulatory process.
How important is this one thing in the broader context? If your entire business is predicated on launching in a particular market or bringing a particular product or service to the public and you’re convinced that waiting for approval on the front-end will never happen (or take too long to survive the wait), then (absent facing likely criminal prosecution) launching and being prepared for the fallout makes sense. But if you know you have (or will soon have) bigger priorities that will come before those same regulators in those same jurisdiction, you may not want to grab the small win at the expense of the bigger victory. It’s not an all-or-nothing proposition (you can fight with regulators on some issues and agree on others), but weighing the combination of your priorities and their personality (some people are more forgiving than others) is worth doing.
These are only a handful of the questions you’ll need to ask yourself and the calculations you’ll need to make to decide how to proceed. And even then, politics is more of an art than a science, so there’s no guarantee you’ll make the right choice. But like pretty much everything in life, the more prepared you are, the more thoughtful you are, the smarter you are, the better your chances of success.
The above appeared on Forbes.com on February 25, 2016.