Wednesday, March 02, 2016

Disruptor Companies Should Challenge Regulatory Status Quo - But Not Dis It

My friend Ron Klain, an esteemed leader in both the public and private sectors (top executive with the Steve Case/Ted Leonsis private equity firm Revolution; former President Obama "Ebola Czar" and Vice President Biden's chief of staff during Obama's first term), just penned a terrific, instructive piece in Fortune, "Proof startups can't afford to ignore the law."

Ron makes the excellent point that innovative startups, especially disruptor companies like Uber and Airbnb that have upended legacy industries and assaulted regulatory convention, must proceed with prudence.  Otherwise, they risk being blindsided by politicians and even consumers who support the existing regime. As he aptly notes in a beautiful line, "The public roots for underdogs, not unicorns." I agree. The regulatory rubric is somewhat analogous to the earth which must be moved and the weather which must be contended with when one constructs a building - a reality you can't ignore or wish away. New industry entrants shouldn't receive an automatic exemption from legal restrictions merely by dent of their newness or ability to harness cutting-edge technologies. A great example in the legacy media space was Barry Diller-backed startup Aereo. In 2012, the company was planning to launch a service that ignored the cable and satellite TV copyright and licensing legalities and enabled its subscribers to watch local broadcast TV stations online at a lower cost. After egregiously errant federal court and Court of Appeals decisions initially allowed Aereo to proceed, the U.S. Supreme Court rightly ruled that Aereo could not operate without adhering to existing law and regulations. Deprived of its bogus "competitive advantage," Aereo was no longer viable and shut down shortly thereafter.

On the other hand, the emergence of innovators and disruptors provides a wonderful opportunity to revisit - and in many cases eliminate or at least overhaul - calcified, inefficient, stifling laws and traditions.

In stressing the need for these paradigm-shattering companies to send the right message to the powers that be, Ron questioned the wisdom of Zenefits (which provides software for businesses to automate aspects of their human resources services, including healthcare benefits, and has been under assault by insurance regulators across the U.S.) naming legendary Silicon Valley entrepreneur and regulation-loathing libertarian Peter Thiel to its board.

I see it differently. Were I heading Zenefits or another potential disruptor company, I'd want to have both Thiel AND Ron Klain on my board!


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