Regulatory Fabric as Market Timing
This article was originally published on TechCrunch
Market timing — how relevant an idea is to the current state and direction of a market — is the most important factor in determining the durability of that idea. Several inputs inform market timing. The skew of consumer preferences in response to a pandemic. The price of goods for a resource that is finite and becoming scarce. The creation of a novel algorithmic or genetic technique that enlarges the potential of what can be streamlined, repaired, and built.
But market timing is also defined by a less discussed area that is born not in capital markets but in the public sector — the regulatory landscape — namely, the decisions of government, the broader legal system, and its combined level of scrutiny toward a particular subject.
We can understand the successes and challenges of several valuable companies today based on their combustion with the regulatory landscape, and perhaps, also use it as an optic to see what areas represent unique opportunities for new company start and scale.
I. Looking Backward: The Value in Regulatory Gray Areas
At The Aspen Institute in 2013, Uber co-founder and former CEO Travis Kalanick said, “The tech comes in and moves faster than regulatory regimes do, or can control it.” The brash statement downplayed that the regulatory landscape had, in fact, driven a number of pivotal outcomes for the company up to that event. It changed its name from Ubercab to Uber after receiving a cease-and-desist order in its first market, California. Several early employees left because of the startup’s regulatory challenges and iconoclastic ethos. It shut down its taxi service in New York after just a month of operations, and then in early-2013 received its lifeline in the city after being approved through a pilot program.
Fast forward to the present date, and Uber has a market cap of ~$97B, with the ousted Kalanick having a personal net worth of ~$2.8B. Still, even at its scale, many of its most important questions on growth center around how favorably the regulatory landscape will treat its category. Most recently, this came with the UK’s Supreme Court ruling that Uber drivers could not be classified as independent contractors.
The regulatory fabric has had similar leverage over other sharing economy companies. In October 2014, for example, Airbnb’s business model became viable in San Francisco when Mayor Ed Lee legalized short-term rentals. In November 2015, Proposition F in the city aimed to restrict short-term rentals like Airbnb, and the startup spent millions in advertisements to mobilize voters in opposition.
Airbnb’s current market cap stands at $86.7B, and its CEO, Brian Chesky, has an estimated net worth over $11B. Like Uber, its regulatory tribulations continue, most recently being fined and judged to owe $9.6 million to the city of Paris.
The stories of these two companies and others in the sharing economy space demonstrate the value that the regulatory fabric can add or subtract from a company’s wealth, but also underscore the value — for founding teams, early employees, investors, and customers — of navigating the gray areas.
II. Looking Around: The Data Economy
The present regulatory fabric has precipitated market timing for ideas in a number of categories. Solutions that enable data privacy, like BigID, and ones that embed data privacy into larger customer value propositions, like Blotout, are on streamlined growth tailwinds from the GDPR in Europe and their inspired analogs in the U.S. Organizations by and large are orienting significant time and strategic choices in response. It’s clear in the advertising around us, as Apple’s new billboards reflect:
It’s also clear in broader statistical findings. Cisco’s 2021 Data Privacy Benchmark Study, for instance, found several striking figures:
- Privacy budgets doubled in 2020 to an average of $2.4 million
- Privacy laws are viewed favorably across the world, with 79% of organizations stating they believe these laws have a positive impact
- External privacy certifications are an important buying factor for 90% of organizations
- 93% of organizations are reporting privacy metrics to their Boards
Concurrently, the market for AI governance tools, particularly ones that can make AI more explainable, continues to grow, spearheaded by comprehensive solutions like TakTile. Like data privacy solutions, these trends are not entirely due to the regulatory fabric; instead, they also reflect shifting consumer preferences, and the practical necessities of managing troves of data that were not captured historically. Nonetheless, much of the momentum here too can be traced to the emerging regulatory fabric, ranging from the FTC’s guidance on data bias and transparency in AI algorithms, to the EU’s warning that fines for noncompliance can be up to 6% of turnover.
RegTech as a category has boomed to a $7B market, and is expected to more than double over the next five years. Perhaps most augural is the velocity of growth in emerging areas, like blockchain, whose compliance needs have driven the hyperscale of companies like Chainalysis.
III. Looking Forward: Recent Signals and Gray Areas
If we look at the way the regulatory fabric is being stitched, then there are a number of areas that will provide outsized returns. Three stand out in particular.
Taxes — The rising popularity of cryptocurrency has led the Treasury Department and IRS to call for stricter compliance on taxes. Coupled with the rise of the gig and creator economies, continued boom of alternative assets (e.g. NFTs), legality of student-athletes monetizing their brands, and other rising forms of new income streams, technologies and structures that support with tax filings and savings will find a ripe market to start in.
Telemedicine — Although the telemedicine market has grown immensely over the past few years and produces companies like Teladoc and Ro, the strain of the COVID-19 pandemic has informed strong regulatory momentum for easing current barriers. In Arizona, for example, H.B. 2454 was signed into law, which reduces licensing requirements to enable out-of-state healthcare providers to service patients in the state and ensures proper compensation through insurance reimbursement schemes. As more geographies remove inefficiencies to telemedicine, solutions that provide care and handle administration processes will proliferate.
Climate Change — The Biden Administration has signaled significant regulatory incentives for green tech solutions. In April, they announced a target for the U.S. to reduce greenhouse gas pollution 50–52% by 2030, and achieve net zero emissions by 2050. The guidance includes a vision for more investment in building a transmission grid, electric vehicles and charging infrastructure, carbon capture tools, and enabling farmers to foster sustainability in soil (e.g. carbon sinks). In aggregate, the support of the public sector streamlines private market solutions through access to alternative (often equity-free) capital and press recognition, which is crucial for a market that typically requires longer time to monetization and profitability.
Ultimately, the regulatory fabric is an important market maker or breaker. That is true for nascent companies searching for answers to the “why now?” of market timing, and also for established, public companies who are answering strategic questions of how much more they can grow. Hopefully, this understanding fosters greater examination of regulations and collaboration with the public sector in solving the great challenges of our time.
