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Proof Startups Can’t Afford to Ignore the Law


At the dawn of the app economy, the range of economic activity surrounding mobile applications, Uber has set the tone and changed the way traditional business is done. Executives defied rules and state laws, with the hope that they can apologize and sort out it all later. Airbnb and countless other start-ups have tried to follow, seeking their own billions in funding with an “ask for forgiveness, not permission” approach to regulation.

That approach might have worked for a while, but that won’t last. Some app economy stars are getting roughed up as they tangle with enforcement and policy officials. Daily fantasy sports powers Fan Duel and Draft Kings are flailing under pressure from State Attorneys General about their business practices. High-flying start up Theranos is facing harsh scrutiny from state and federal regulators about its blood testing technology. And Zenefits — saw its founder and CEO forced out over alleged violations of insurance brokerage laws in seven states. What went wrong? Why didn’t the Uber/Airbnb playbook work for these new players? As someone who has served on four different posts in the White House, and spent a decade as General Counsel to a technology-oriented venture capital firm, my perspective comes from having been on both the tech sector and government side.

Start-ups have a role to play in challenging these archaic schemes and demanding reexamination. But as startups increasingly move into heavily regulated spheres like financial services, health care, insurance, energy and transportation, the risks of “regulatory disruption” will grow more serious, which the chairman of my firm, Steve Case, argues in a forthcoming book, The Third Wave.

See also: Why Zenefits and Other Tech Upstarts are Getting Their Comeuppance

In their earliest regulatory battles, Uber and Airbnb had successfully encouraged their own customers to pressure regulators to back off. Time and again, these startups used “people power” to get their way. But as some startups make billions, the public has grown more skeptical about cries of foul from app economy powerhouses. As DraftKings, Theranos and Zenefits have learned, hordes of consumers are not going to come to their rescue as regulators move against them. The public roots for underdogs, not unicorns. So how can startups in these heavily regulated fields balance their instincts for disruption with the necessity of complying with rules to protect consumers, health and safety, and public confidence?

First, they need to learn — not from Uber and Airbnb circa 2009 — but from what the sector’s leaders are doing today: both have highly sophisticated regulatory and public policy teams, and are looking for ways to work within legal frameworks, not defy them: meeting directly with policy makers at all levels of government, and accepting regulations that they previously considered an anathema. That’s not to say that they have frictionless interactions with regulators: far from it, as the battle over the status of Uber’s 1099 workers continues, and as Airbnb still wrestles with local real estate laws and condo boards. But instead of staying outside the system and thumbing their noses at it, both companies — and a wide variety of startups that appreciate how this dynamic has changed — are actively engaging policy makers at all levels of government, and trying to find common ground.

Second, rather than focusing solely on the benefits they bring to their customers, today’s startups need to find ways to produce positive social changes for the community as a whole. Airbnb, for example, recently sent a top official to meet with mayors to boast about how much tax revenues their short-term rental transactions yield for local governments. This is similar to how Zipcar won highly-valuable on street parking places in the nation’s largest cities (such as Washington, Boston, and Los Angeles) by aligning itself with policy makers seeking alternatives to high levels of private car ownership in urban areas. Even the largest unicorns now understand they exist in a regulatory and policy ecosystem, and need to be seen as forces for positive change within that system — not adversaries.

And third, they need to be transparent about their problems and challenges, and approach regulatory conflicts with humility. Government does not always know best, but neither does Silicon Valley. Rules designed to protect workers, consumers, public health, and competition may be old — but still have a compelling purpose and strong public support. Coming clean about where lines have been crossed, categories confused, or honest mistakes have been made is critical.

In a letter to employees announcing a “new founding” of the company following the ouster of its founder, new Zenefits CEO David Sacks acknowledged “that the problem goes much deeper than just process. Our culture and tone have been inappropriate for a highly regulated company.” Booming app economy companies like Zenefits needs the best advice they can assemble: executives, outside advisors, and board members who know both regulation and innovation; who are willing to question existing rules and seek change — but respect where the lines are drawn and the objectives of regulation and public policy.

Clear messages are critical at a time like this. So it seems odd that Zenefits’ announcement of a “new founding” included the addition of a new member to its board: Peter Thiel. Thiel is a brilliant investor, a Silicon Valley leader — but a renowned libertarian with a disdain for government, described by Fortune magazine as the man who “never met a regulation he didn’t hate” and who has even suggested that the FDA’s regulation of drug safety is “too stringent.” Is this the right move for a company that is losing its CEO due to its massive disregard of regulations, and is about to face a dizzying array of compliance actions from coast to coast?

See also: Bill Gates Offers Common Sense on Unicorns

The app economy is at a critical crossroads. It can produce great innovation — technological, economic, and regulatory — and great success. But it can no longer do so with an attitude of avowed antipathy toward regulation, policy makers, and the visions of common good that drive these key players. It cannot afford to blow the regulatory moment of truth it is now facing.

Ronald A. Klain is the general counsel of Revolution, a Washington-based venture capital firm. He previously served as a senior White House aide to Presidents Clinton and Obama. Revolution was previously an investor of Zipcar. It is not currently an investor of Uber, AirBnB, FanDuel, Draft Kings, Theranos, or Zenefits.