The State of Regulations in Silicon Valley

The State of Regulations
in Silicon Valley
Silicon Valley’s innovators are not immune
to government risk
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Intro
Visionaries in Silicon Valley have been building the future for nearly four
decades. These pioneers in engineering, design, and investing have had to
discount, and sometimes even disregard, the current regulatory environment
in order to first reshape how the world thinks about technological problems
and solutions.
Yet, as an increasing number of companies based in or influenced by Silicon
Valley are finding out, disruptors in a variety of sectors cannot afford to miss
or ignore emerging policy trends that can jeopardize certain operations or
even entire business models. This is particularly true for innovators who seek
to enter markets populated by slow-moving incumbents. While fast, nimble,
and technologically-advanced startups in sectors such as health care,
finance, and energy have massive upside potential, part of the reason legacy
companies are so slow is because of extensive regulatory requirements.
Contents
Intro1
The Gig Economy 4
The Sharing
Economy
5
Biotech &
Genetics 6
Healthcare and
Medical Devices
7
Cryptocurrencies8
Drones 9
Renewables
10
Conclusion
11
Recent events involving some high-profile startups show that Silicon Valley
innovators won’t succeed through a head-in-the-sand strategy toward the
policymaking process. Only those innovators who proactively engage with
lawmakers and regulatory agencies, to tell their story and lay out their vision,
will successfully establish themselves in regulated markets.
Future remains uncertain for Silicon Valley
Recently, fears of a technology industry market correction have resulted
in declining valuations and slower growth in the Valley. Compounding
these concerns are a mix of added legislative and regulatory pressure for a
variety of industry verticals. With added scrutiny, legislatures and regulatory
agencies are taking a close look at how technology companies operate
across the country. New federal and state provisions on fair labor practices,
consumer data privacy, e-commerce taxes, and a whole host of other issues
have added complexity to the growth equation for new technologies.
Additionally, in an election year, entrepreneurs and big business alike face
uncertainty regarding the style by which policymakers at all levels will choose
to lead. No matter who ends up at the helm of 1600 Pennsylvania Ave.,
turnover from the Obama administration will come with new priorities. As
such, federal agencies are racing to promulgate new regulations in order to
complete the agenda of the current leadership.
1
Intro
In Congress, even if Republicans continue to control both chambers, the
new political dynamic will bring new tensions, opportunities, and threats to
innovators. State leadership could see dramatic changes as well with more
than a dozen legislatures and 12 governor seats up for grabs this November.
Unforeseen government pressure can have cascading consequences on
the economic climate and general sentiment toward access to capital and
growth projections. For an industry that prides itself on innovative and
disruptive technologies and business models, these external influencers
can have significant impacts on the growth of startups and even established
companies.
Challenges facing technology companies
It’s inordinately difficult for innovators, who are so focused on their cutting
edge technology and the growth of their company, to also understand
the complex policy environment in which they exist. But when each new
product and service is launched with little understanding, regard, or strategy
for dealing with future government risk, innovators are placing their future
growth in jeopardy.
As they make plans for scaling up, all startups should incorporate an
appropriate government affairs strategy, including a plan for identifying and
complying with existing laws, advocating their positions with lawmakers, and
relationship building with key government and industry stakeholders. These
steps will help confront the mound of challenges, from issues at all levels of
government and the patchwork of laws and regulations across jurisdictions,
to facing incumbent political forces, and tricky policy battles.
Reactive government affairs strategy
“Bill [Gates] did not engage – either himself or the company – in the political
process early enough… Bill’s attitude was the government should just go away
and leave Microsoft alone… Well, this approach of not constructively engaging
the government and concerned politicians, of not alleviating concerns that
were not going to go away, was a disaster. The US federal government, many
states, and the EU all essentially declared war on Microsoft, and Microsoft paid
a devastating price.” Brad Silverberg
Microsoft SVP (1990-1999) on Bill Gates’ worst decisions as CEO
2
Intro
Too many new companies suffer from the mindset that the government
should stay out of their way, while most others have a reactive strategy. What
they fail to understand is that, especially when new innovation is involved,
there is a considerable amount of education that must be done if lawmakers
are to understand the benefits or reasonable risks associated with a new
technology or service.
Without a plan to take control of these matters, the situation can get out
of hand. Outfits with a reactive strategy play defense and field issues as
they come. While this strategy can appear to be more cost efficient initially
– especially for groups new to government interaction – it often results in
losing control of your business strategy to the desires of government.
A proactive approach to government affairs gives organizations opportunities
to tell their story and message before anyone else. By building strategic
relationships with policymakers early in the process, growing ventures can
ensure lawmakers understand both the opportunities of a group’s innovation
and what’s at risk by imposing barriers.
Proactive government affairs teams know the value of digging a well before
thirst kicks in – crafting a policy environment that’s best for the business and
building a grassroots army ready to go to war to defend the technology.
What follows is an overview of some of the most exciting, fast-growing,
and policy-fraught sectors seeing Silicon Valley innovation. While a few
companies in these sectors have developed sophisticated strategies and
implemented tools to manage their relationships with government, others
are still flying under the radar – for now.
3
 The Gig Economy
Trends: Obama administration not interested in change;
state and local laws creating a compliance headache
VC Investments*
Federal Action
• A third category of employment, the “independent worker,” is being
floated around DC.
Uber
$9.01B
• Labor Secretary Tom Perez said his department would need legislative
action from Congress in order to craft “a third category of employment”.
• The Obama administration is focused for now on clarifying existing laws
to protect employees. Congressional action is unlikely this session.
Lyft
$2.01B
Upwork
$74MM
TaskRabbit
$37.68MM
State Action
• Several bills across the states have been introduced to clarify or establish
minimum requirements for what constitutes an employee or contractor.
• Other bills would enable “gig economy” workers to collectively bargain in
certain states.
• The risk of a state-driven legislative approach is a “patchwork” of
different standards from state to state, creating compliance difficulty for
companies.
Local Action
• Efforts to allow independent workers to unionize are underway in some
municipalities.
• Many local governments are more focused on the customer, pushing for
more stringent background checks.
HourlyNerd
$12.55MM
4
 The Sharing Economy
Trends: Possible post-Obama administrative action; state
and local powers seeking to “level the playing field” between
old and new guard
VC Investments*
Federal Action
• The FTC could investigate whether prices set by algorithms, rather than
by the workers, could constitute as price fixing.
Airbnb
$2.39B
• Discussed at a June 2015 FTC workshop, there has been no indication
that the Commission is prepared to act.
State Action
WeWork
$1.43B
Rent the Runway
$114.4MM
• State legislatures have been working to clarify where liability falls in cases
of accident, misconduct, or illegal behavior.
• Political forces of traditional business are lobbying to level the regulatory
playing field in terms of stricter licensing, certification, insurance
requirements, safety inspections, and personal information disclosure.
Local Action
• Cities are increasingly working to enforce the same zoning restrictions
and tax collection requirements for sharing economy companies as their
traditional business counterparts.
Turo
$97MM
Zopa
$56.63MM
5
 Biotech & Genetics
FDA has prioritized innovation while ensuring safety in
industry manufacturing standards; states are focused on
disclosure and consumer protection
VC Investments*
Federal Action
• The FDA has the authority for regulating safety and effectiveness of
genetic testing.
23andMe
$225MM
Counsyl
$103MM
Neon Therapeutics
$55MM
• 84 public comments were submitted on an FDA workshop in March 2016
on patient and medical professional perspectives on genetic test results.
• Personalized drug combination testing has received oversight by FDA
in the form of guidance documents (nonbinding) aiming to protect
innovations and ensure thorough testing and evaluation.
State Action
• Washington state has 17 regulations associated with genetic testing,
counseling and licensure.
• A New Jersey resolution urged Congress to fund personalized medicine.
• 112 bills were introduced this session on informed consent for genetic
testing; 40 of these have been enacted.
Local Action
Iterum
$40MM
• Little to no action at the local level at this time.
Blueprint Genetics
$3.9MM
Recombine
$3.3MM
6
 Healthcare and Medical Devices
Trends: Data security, privacy, and safety are biggest
concerns of federal regulators; states scrutinize safety
practice and licensure standards
VC Investments*
Federal Action
• Data security and protection is a concern regarding these devices.
Doximity
$81MM
Omada Health
$76.5MM
• HIPAA compliance for “connected medical devices” will continue to be a
challenge.
• Medical devices contain large amounts of sensitive patient/customer
data.
• Unauthorized access to devices, particularly drug delivery devices, is
seen as a vulnerability. Citing concerns, FDA guidance urges “privacy-bydesign”.
• The FDA reported 32 medical device recalls in 2015.
State Action
ALung
$59MM
HealthTap
$37.8MM
• Telemedicine continues to face regulatory parity challenges across many
states. In the twenty-eight states scored poorly in 2015 ATA report on
telemedicine.
• Many states have unequal standards for Physician Practice Standards
and Licensure regulations. In fact, some have more stringent
requirements for telemedicine than for conventional care.
Local Action
• Most regulations are preempted by state or federal authority.
Neurotrack
$8.6MM
Consano Medical
$3.9MM
• Municipal health departments are granted authority through “Dillons
Rule” or “Home Rule” by the state.
7
 Cryptocurrencies
Trends: Washington likely to provide guidance around
cryptocurrencies, not regulation; states begin to license
practice standards like the banking industry
VC Investments*
Federal Action
• Congress may soon work to clarify that cryptocurrencies are currency
and should be regulated as such.
Coinbase
$106.71MM
BTCjam
$9.2MM
• Crime and security departments and agencies, like DOJ, DHS, and SEC,
are focused on enforcing current laws regarding how criminals and
terrorists might use cryptocurrencies, but are not poised to release
regulations.
• The most likely near-term action is for regulatory bodies to provide
guidance, rather than regulations, clarifying how to treat various
cryptocurrency transactions.
• For example, the IRS has provided guidance that cryptocurrencies are
treated as property for tax purposes.
Kraken
$6.5MM
Bitpagos
$2.08MM
State Action
• Some states, like New York, are issuing BitLicenses for companies to
serve as money transmitters for cryptocurrencies.
Local Action
• Little to no action at the local level at this time is expected.
GoCoin
$2.05MM
8
Drones
VC Investments*
Trends: The FAA is looking to preempt a patchwork of state
regulations. The agency will allow drones to fly, but not at
the risk of other aviators. State and local governments have
an aggressive approach but these regulations may be shortlived with federal preemption
Federal Action
DJI
$105MM
• The FAA issued an Interim Final Rule on Dec. 16, 2015, to preempt state
and local regulations.
• All Class B airspace is now restricted from drones and other aerial
vehicles; and all Unmanned Aircraft Systems (UAS) weighing 250g to 25kg
must be registered with the FAA .
3D Robotics
$99MM
• The FAA also partnered with industry organizations to promote “Know
Before You Fly” for recreational UAS.
State Action
Skycatch
$42MM
DroneDeploy
$11MM
• In 2016 sessions, 41 states have considered legislation restricting UAS.
• Of these, eight states have passed 12 pieces of legislation on the use
of drones for a variety of applications including hunting, traffic crash
investigations and surveillance.
Local Action
• Various city resolutions have passed urging Congress and state
governments to pass comprehensive drone regulations.
• Several major cities have already banned drones, at least temporarily:
Chicago, IL; Charlottesville, VA; and Syracuse, NY.
Verifly
$2.1MM
9
 Renewables
Trends: Political concerns regarding climate is global, but
DC is slow to enable pro-environmental change; states want
to help but lack dedicated funding and need regulatory
overhaul
VC Investments*
Federal Action
• Possible Congressional action is needed for the United States to meet
new COP21 greenhouse gas reduction standards.
Brightsource Energy
$845MM
• There is a lack of certainty around funding for new energy programs and
initiatives; some lawmakers may seek alternative financing mechanisms.
• States need stronger federal governance to enable better interconnection
between regional power grids.
AltaRock Energy
$26.25MM
Biofuelbox
$14.66MM
Axium Nanofibers
$9.61MM
State Action
• Dedicated, sustainable financial sources for green energy incentives are
needed.
• Complex Public Utility Commission regulations, especially net metering,
need amending and updating to accommodate new solar and wind
technologies.
• State energy agency executives are looking to identify creative financing
for dedicated green energy initiatives.
• More states are calling for a higher renewable portfolio standard (RPS) for
state power sources in the next 2-3 decades.
Local Action
• Little to no action at the local level at this time.
InEnTec
$4.95MM
10
Conclusion
Innovators have long leveraged advantages in talent, technology, and venture
capital, but they have often been constrained by regulatory environments
that seemed far outside of their control. Likewise, investors must be more
cognizant of potential government risk when evaluating prospective portfolio
companies.
Emerging technologies and solutions for government relationship
management, however, now make it possible to proactively engage with
lawmakers and regulatory agencies at home and abroad. Innovators can
better inform the policy discussions surrounding rapid change across
industries by taking control of their government strategy. In doing so, they
can fully realize the opportunities of new products and businesses created in
and around Silicon Valley.
For more information on how to take control of your government strategy,
sign up for our newsletter, www.fiscalnote.com/newsletter.
*VC investment
figures taken from
CrunchBase
11