Become shrewd about regulations when launching your startup
Compare how these sharing and tech startups challenge regulations
It is sometimes easy to miss the huge impact that legacy regulations can have on a great new sharing-based business model, or for a product with cutting-edge technology.
“From an entrepreneurial perspective; that regulatory hurdle is key to your business,” said University of Nevada, Reno Economics Professor Emeritus Jeanne Wendel.
For example, the San Francisco-based startup Lime faced challenges in 2019 due to the very inventiveness of its product. Lime, the platform co-founded by Toby Sun and Brad Bao in 2017, features two-wheeled modes of transport placed at varied locations around town. Commuters use an app to lease the bikes or scooters and drop them off, not at a central dock, but at a site of their choice.
LimeBike came to a sudden halt, though, in Sparks, Nevada when its city council voted not to renew the contract with Lime after January 2019, according to the Sparks Tribune. Shortly after that, in March, the Reno City Council also decided to let the program expire. The sharing service, as it unfolded, did not correspond with standing transportation definitions in the eyes of city lawmakers.
“And I think with the scooters, there were issues of liability — people are now on slightly motorized devices, and are they cars or are they people or are they bikes, and do they do this on sidewalks or on roads,” Wendel asked. “And so you can’t have this new thing without some regulatory structure. ‘What is it, this thing?’ And they apparently didn’t get that solved (in this region).”
The LimeBike program simply did not fit into standard transport formats of Reno and Sparks.
“I think issues were things like ‘Where are people going to leave these bikes’” she added. “Are they going to just be lying around on sidewalks — liability issues. And the city had concerns about things that the company apparently didn’t address enough. …So, if you’re that business, you need to realize in what way you don’t fit into existing regulatory structures. And before you get to the point of being denied, you need to have been figuring that out.”
Exceptionally original ideas out there range from renting camping spots on a property-owner’s field, to parking spots hosted in a home-owner’s driveway. Umbrella intermediaries, in the form of online platforms and apps, make transactions efficient for buyer and seller.
Fascinating lessons learned from how big startups face regulations
Sharing, or collaborative platforms have actually been around since John A. Valentine founded Florists’ Transworld Delivery (FTD) in 1910. The retailers’ cooperative initially connected individual florist members with a common intermediary via telegraph.
Jitney cabs started operating about 1914 — unlicensed, lower-cost rides than the pricey licensed taxi cabs with their background-checked and insured drivers. To pay for expensive licenses, taxis typically drove around in the areas that generated higher fares. Cities also started limiting the issuance of new licenses, or medallions.
“But they wouldn’t prosecute them (unlicensed cabs), because none of these very expensive taxis are going to low-income areas, and the only way the people are getting rides is on jitney cabs,” Wendel explained.
In effect, jitneys managed the regulations by supplying their service to a market not desired by competitors.
Private automobile ride services have an interesting model, as well. Limousines and private car services have been protected from taxi regulations in many cities because rides are not hailed on streets. Customers arranged rides by phone, prior to the development of online scheduling.
Then, the idea for Uber, a transportation network company (TNC) sparked when Travis Kalanick and Garrett Camp had trouble finding a cab in Paris on a snowy December evening in 2008, according to Uber.com. Back in San Francisco in 2009, the two founded UberCab, a mobile phone app that would send for one of three cars in their initial fleet. They dropped “Cab” from the name in October 2010 to separate their brand from traditional taxis, and defined Uber as a technology company rather than a motor carrier because the cars are hailed off-street, through an app.
In the accommodations space, Airbnb has tackled regulations in a similar way, by uniquely defining itself — a peer-to-peer network instead of a hotel brand. In 2007, Rhode Island School of Design alumni and pals Joe Gebbia and Brian Chesky brainstormed a creative way to pay their apartment rent in expensive San Francisco.
“The pair decided to turn their loft into an area that could fit three air mattresses,” according to the Business Insider. “Along with the mattress and a night’s sleep came the promise of a breakfast too. The pair knew a big design conference was coming to San Francisco, and it was making hotels hard to come by. They created a simple site, airbedandbreakfast.com, and bought three air mattresses.”
Successful big startups can be proactive in talking to lawmakers
TNCs Uber and Lyft proactively worked to integrate their business model with state laws, although ride-sharing continues to prompt further adjustments in laws and regulations.
One of the speed bumps TNCs needed to drive over related to competition; to demonstrate that the new companies would not take away business from established taxis, but merely serve the growth of an area. They needed to show how ride-sharing is different from ride-hailing.
“So, if Uber wants to be in the business of driving people around, they had to go and convince the legislatures everywhere that they’re not taxi companies,” Wendel said. …“But they had to convince legislators and regulators that they are a platform that connects people who want to give rides with people who want to get rides — (that) they’re not a taxi company.”
Another concern is driver reliability. TNCs typically use faster and less expensive background checks based on Social Security numbers, in contrast to the longer process the taxi industry uses based on fingerprints.
Early on, TNC reps engaged in a two-way conversation with regulators, listening to their concerns about background checks and liability insurance, coordinating how their companies would address them, she added.
“(Reps said) ’I need to understand how you think about it because I want to do things this way — where can I fit into your thinking,’” Wendel said. “You know, it’s not just a sales job at that point.”
Taxes go hand-in-hand with regulations
It is also sometimes difficult to figure out how a new business model addresses tax codes that have been around for decades.
“It’s like, is an Uber driver a taxi driver — is an Airbnb a hotel,” Wendel asked. “Because when we created those taxes, we said ‘This is a room tax,’ and the only idea we had is where do you stay? You stay in a hotel. So we said, ‘if you are a hotel, you have to pay the room tax.’ And here someone else comes along and says ‘I’m going to compete with hotels, but I made up this name for myself, Airbnb. Oh look, I’m not a hotel, so I don’t need to pay the tax.’”
Hotels and taxi companies have called sharing-based models unfair competition. Traditionally, businesses look to regulators and lawmakers to keep a level playing field among market entrants.
“If you say to an industry ‘I’m going to tax you, you are a method by which I collect taxes;’ that industry, you would think, would have a reasonable expectation that you’re not going to allow a new type of competitor to come in and undercut them on the final price to the consumer, because that competitor who offers the same services doesn’t have to collect the same tax,” she added.
Cutting-edge business ideas may even be in the future of health care
Future collaborative business platforms may include noncritical health care services, such as getting one’s thumb stitched up by a neighborhood Registered Nurse, wrote Jacob Schlesinger in the Wall Street Journal in 2017.
Another new technology-based idea receiving attention is a method for obtaining eyeglass prescriptions using a smartphone app and an inexpensive plastic cube phone attachment. The near-eye tool for refractive assessment (NETRA) is a leading-edge technology developed at the Massachusetts Institute of Technology (MIT) Media Lab. MIT’s initial plan — to distribute the $1–2 clip-on piece and free software app to humanitarian organizations in developing countries as a low-cost beneficial service.
The technology is not offered within the U.S. Legally, only licensed optometrists and ophthalmologists are permitted to measure vision. It is conceivable that someday an entrepreneur or organization may seek to introduce a product such as this to the American market.
The developer of a commercial vision-checking mobile app could make the argument that this tool is not directly measuring acuity — instead, it is a clip-on phone attachment that a user responds to by aligning a group of shapes or lines, Wendel explained.
However, if individuals do not visit an eye care professional for vision checks, they will also miss examinations for glaucoma and other symptom-less and potentially serious eye diseases.
To be regulation-savvy is to think about many possible scenarios
The more innovative an idea, the more an entrepreneur needs to break down a complex structure into parts, and also consider competition.
“When we created the regulations, they totally made sense because the only way you could get an eyeglass prescription was with expensive equipment, and only certain people knew how to operate it, and so we said, ‘Good, they can do that,’” Wendel said. “Now here comes something new and we don’t have any place in our regulatory system for your cell phone measuring your eye. And therefore, your cell phone cannot measure your eye, because from a regulatory standpoint, right now, it’s not legal. And when we make it legal, you threaten the business model of optometrists in the same way Uber threatens the business model of the taxis.”
Uber and Lyft have successfully woven their services into transportation culture. Lime is currently navigating a complex regulatory roadmap. On the other hand, the technology of measuring visual acuity on a cell phone is not distributed commercially in the U.S.
“So, if you want to be that entrepreneur who’s going to do something that is new and different, and it (the product or service) does it in a totally new way that we’ve never thought about before, you better early on realize your regulatory challenges and tackle them,” Wendel said.