Startup firms need to fix their government problem
Startups have a government problem. In Silicon Valley, a narrative has emerged where entrepreneurs are changing the world, while government is standing in the way. This narrative has strengthened in the face of regulatory battles involving Uber, Airbnb and other high-growth startups disrupting entrenched industries. And it’s exactly this mentality pitting the “disruptors” against the “regulators” that is holding back our startups.
It’s time startups stop treating government with disdain or, even worse, ignorance.
The truth is government is now more critical than ever to the success (or failure) of startups. Many of today’s largest and most successful private startups are playing in a public space that is highly politicized, regulated or traditionally handled by government.
For half of the most highly valued, venture-backed private companies, interaction with government is core to their success. This trend continues as you go down the “unicorn” list of billion-dollar startup valuations — from employee benefits platform Zenefits and financial technology startups such as Stripe, to energy company Bloom Energy.
Just a few years ago, the move of startups toward highly regulated industries was unthinkable. But with our governments now cash-strapped and unable to provide us all the quality-oflife services, entrepreneurs are uniquely positioned to step in. If startups can master the tight-rope act of engaging with government, then they can be big winners.
For the startup community, there is a clear business case for working with government. Let’s take some lessons from entrepreneurs in the trenches:
Not everyone likes startups just because they’re innovating. In fact, some may hate startups for disrupting highly entrenched industries. Take the example of Zenefits — a startup that helps small businesses manage employee benefits. The startup is disrupting the health insurance market by cutting out the middlemen, known as health care brokers. In late 2014, Utah declared the Zenefits business model illegal on the basis that its model violated a law against rebates. Zenefits proactively engaged government to change the situation.
Fortunately for Zenefits, Utah’s governor and Legislature stepped in this spring, clarifying that the Zenefits business model is legal.
Just a few weeks later, Zenefits announced a funding round of $500 million at a $4.5 billion valuation. Clearly, it pays to engage with government.
Approach matters. Startups need to be tactical about when and how to engage with regulators. Let’s take the example of Night School, a shuttle service that used school buses to transport individuals between San Francisco and Oakland in the evenings, when public transit was slow or nonexistent. The startup was shut down before it could fully launch. Unfortunately for Night School, it engaged with regulators in the wrong way. It asked for permission before the company had broad-based community support or validation of its service. And without a war chest of funding, Night School couldn’t afford to fight.
It’s a team effort. Productive engagement with government requires investment of resources. Let’s look at Airbnb, which has experienced a backlash in cities like San Francisco around taxation and fears that it reduces the affordable-housing supply. But the startup has taken a proactive approach to working with government. First, it speaks the language of government — collecting and sharing data on housing impacts, spending and tourism. Second, Airbnb has a collaborative approach to lobbying — with an expansive government relations and civic partnerships team, lobbyists, and key lawyers to help navigate the complexity.
Uber is an exception. Perhaps no company’s battles with regulators have been as public as Uber’s. The ridehailing service has grown to more than 300 cities across the globe, developing notoriously antagonistic relationships with many regulators along the way. Frankly, Uber is going to be successful in spite of itself because it has the money to fight these battles. Its combative strategies have alienated a lot of regulators — and this is going make it more difficult for the startups that come after them because, unlike Uber, new startups won’t have the multibillions of dollars in cash to fight.
Time to throw out the stereotypes. We’ve entered a new era of startup innovation — one where government will mean life or death. It’s time for startups to throw out their stereotypes and indifference to government. In this era, the most successful startups will see government as a partner, not a problem.