This is a contributed post from Katarina Hasbani. Drawing from her deep experience in the energy sector, Katarina gives advice to start-ups looking to work in highly-regulated sectors, arguing that regulation is not always the enemy.
Katarina is a specialist in policy and regulation surrounding the energy sector. She has almost 15 years of experience from Europe, Middle East and South-East Asia. She moved to Singapore from Dubai, where she was directing Dubai Government’s efforts to reduce the Emirate’s energy consumption by 30% in the horizon of 2030. In the European Commission, she was involved with EU’s gas diversification efforts in its Easter and Southern Neighborhood along with policy work on electricity and gas market liberalization, increased use of renewables and improvements in energy efficiency.
Regulation and startups: An unexpected opportunity (Katarina Hasbani)
For tech startups, government regulation can be more than just necessary evil to deal with. Regulation can be an opportunity for growth, partnerships and influencing future direction of regulatory regimes for new products and services. Take a wild leap of faith and read on.
Is marriage between regulation and start-ups set up for a crash landing? Let’s revisit the reasons why some might think so.
There are inherent conflicts in the operating speed and style of start-ups and Governments. Governments use regulation to protect the environment or consumers’ health, and to correct market failures. The process of government regulation is a long, formalized and yes, boring process.
On the other hand, startups are created with the purpose of challenging the status quo. Their new services and products are created where there is a need. Startups work fast and iterate often as they advance in their execution. Because of the need for speed, they have tended to take the approach of “going in first and dealing with regulations later”. As a result, many start-ups have experienced regulatory backlash:
- Airbnb is facing tough restrictions to its operations in several cities, including Amsterdam where Airbnb guests cannot rent their premises for longer than 60 days a year.
- Zenefits, a corporate benefits software startup, hit a significant regulatory snag in 2015 when media reports revealed that its insurance offerings were being sold by salespeople who were not licensed in the heavily regulated insurance industry.
- In June 2016, new U.S. government regulations limited commercial drone service for deliveries and squashed Amazon’s drone delivery service plans in the country. Amazon took its plans to the U.K., which doesn’t have such strict regulations, and completed its first drone delivery in December 2016.
However, this is only one side of the story: Government regulation does provide opportunities for start-ups, and founders would be wise to pay attention to where this is happening.
Government regulation sometimes helps to introduce competition and foster innovation in a market, creating opportunities for start-ups. One way to do this is to regulate entities with a dominant position in the market. Start-ups can benefit from competitive market situation and push through a new product and service. Tech unicorns of today might forget that it was the breaking down of telecommunication giants in the US by government regulation, which brought about greater innovation in this space.
Regulating competitive practices is central to the role of the European Commission (EC), which has been systematically assessing impacts of mergers on innovation. Interesting evidence is emerging to illustrate the impact of mergers and consequently dominant position in a market on innovation. The research states that mergers, both horizontal and vertical, may reduce innovation by, inter-alia, decreasing budges allocated to R&D. The EC has been eying tech industry and dominant position by some of its key players in an attempt to spur competition. Its ruling against Google for abusing dominance in its market comes with an astonishing fine of 2.42 billion EUR. Google’s case might incentivize other large tech players to open up their respective market segments, resulting in more competition, innovation and opportunities for start-ups.
Regulating on data availability is another way that governments can create opportunities for building businesses. UK land registry publishes data on house transactions allowing Zoopla to create a model valuing all UK properties. Transport for London makes its data freely available spurring a plethora of apps to help with journey planning. The Competition and Markets Authority in UK is reshaping the energy market: Energy supply data on customers will soon have to be made available so that customers can be approached with a lower price offer from one of the alternative suppliers.
How to capitalize on regulation: Lessons for startups
I’ve argued that Government regulation is not always detrimental to start-ups. But how can start-ups find opportunities in highly-regulated sectors? If you are a start-up looking to enter a highly-regulated industry, here are three tips from the experiences of the energy sector, which I have worked in for many years:
- First, Government regulation can be a market opportunity but you need a transition plan in case regulation changes.
European governments decided few decades ago to give favourable treatment to electricity produced from renewable energy sources. The mechanism used was a feed-in-tariff, which provides renewable energy generators a remuneration above retail rates of electricity. What came about in Europe was a renewable energy boom and pressure to innovate among technology providers. The number of patents in renewable energy increased three times in Germany between 2007 and 2013. Three years in a row (2010 -2012) Germany added on annual basis more than 7 GW of solar installed capacity, which equals to half of Singapore’s total power generation capacity.
Until today, Several German companies stay technologically ahead of the game despite the competitive pressures from China and its cheaper products. Would the renewable energy revolution happen anyway without government regulatory support? It might but it would not happen as fast.
- Second, not all the governments regulate the same way and there is always a window of opportunity that can be used to pioneer your product or service with a friendly government regulator.
The case of hydraulic fracking represents the contrast between regulatory approaches in the US and the EU. The US regulates only when any issues of public concern arise, the EU takes preventive measures to avoid any possible negative public impacts.
Fracking involves injection of highly pressurized liquid in the rock to extract natural gas and petroleum from previously unreachable locations. The technology was pioneered and actively pursued in the US with relatively limited regulation until some of the negative impacts started emerging. Accidents and exposure to harmful substances used at fractured wells were raised as main concerns, which resulted in ban on hydraulic fracking in some states (Vermont and New York). While controversial in its environmental and public health impacts, hydraulic fracking is widely credited for the comeback of US energy independence based on its domestic production of natural gas and reduced role of the Middle East in global energy supply.
This contrasted with the EU approach, which has taken preventive rather than reactive approach and has banned the fracking before larger application by the industry. France banned fracking in 2011 and other countries in Europe introduced measures limiting fracking in subsequent years.
- Third, follow how government regulations are shaping their industry and/or market in country of their operation and worldwide. Regulatory changes might make incumbents more open to potential partnerships.
Finally, the German utilities sector offers an additional view on potential macro-consequences of government regulation. RWE (now Innogy) and EoN, two of Germany’s largest utilities are changing their business models completely as an unintended result of the government policies and regulations in German energy market. A mix of renewable energy targets and obligations to improve energy efficiency has forced both companies to restructure. The traditional energy assets remain with the legacy company while a new entity was created by both entities with a focus on services in decentralized energy and energy efficiency. The move puts incumbents on equal footing with number of young, agile startups, which are exploring the energy services space. Incumbents are keen to create partnerships to capture new market niche faster.
In summary, my advice for start-ups seeking to enter highly-regulated sectors is that Government regulation will have a profound impact on your startup, whether you want it or not: so make sure it works to your advantage.