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Making Profits by Disrupting the Regulatory Status Quo

| Aug 24, 2016 | Analysis

    Earlier this year, hundreds of taxis clogged the streets surrounding Philadelphia’s City Hall. Taxi drivers blocked traffic and honked horns to protest what they believe are Uber and Lyft’s illegal operations in Philadelphia and the city government’s failure to regulate properly. Yet, even when faced with strong opposition like this, Uber and other startups continue to enter into regulated sectors.

    In a recent paper, University of California-Hastings College of Law Assistant Professor Abraham Cable, explains how, despite regulatory uncertainties, some startups like Uber are able to grow and even thrive. He focuses on “reformer startups,” which he defines as “startups premised on regulatory reform or acquiescence because they operate in the face or shadow of prohibitive regulatory regimes.”

    Philadelphia NightscapeCable argues that when reformer startups enter the market they are not only trying to promote their products and services, but they are actively trying to disrupt the currently regulatory scheme in order to function and expand. For example, when ride-sharing startups like Uber, Lyft, and Airbnb first began operating, it was unclear—as it still is—how the government would regulate them.

    In support of his argument, Cable highlights a few well-known “regulatory truces” between reformer startups and government regulators. These “truces” include a 2014 San Francisco ordinance that legalizes short-term housing rentals in order to accommodate AirBnB’s operations.

    Last year, Airbnb experienced another regulatory success with the defeat of San Francisco’s Proposition F—a proposed ordinance that would have increased regulation of short-term rentals. Airbnb reportedly raised more than $8 million dollars to conduct its opposition campaign.

    Cable believes that this growth and success can be partially explained by the extraordinarily large amount of resources available to reformer startups. These unicorn startups—including Uber and Airbnb —have the financial freedom to engage with regulators in a strategic and influential way. A few startups have hired personnel with extensive political experience to serve as dedicated government relations specialists.

    The availability of venture capital—a type of capital used to fund high-risk investments like startups—has also increased in recent years. Cable argues that this influx of money is creating more competition among venture capital firms, which has opened this funding up to reformer startups. With more competition, firms have fewer opportunities to fund less risky companies and are pushed to fund startups that would operate in an uncertain regulatory environment.

    Although increased funding can lead to more experienced staff and lobbying, Cable hypothesizes that there is another reason for reformer startups’ success—consumer support. According to Cable, consumers enjoy the benefits these startups provide, such as less expensive or more convenient transportation and lodging options.

    Aside from the popular support of the products themselves, Cable argues that technological innovation and entrepreneurship are important values in U.S. culture. Public admiration of the entrepreneurial spirit places Silicon Valley and its startups in a “privileged” political position. According to Cable, society has a vested interest in the success of startups, making it politically savvy to support regulations that allow for their growth. Because of this, politicians and regulators are willing to adjust regulatory frameworks to accommodate these startups.

    However, reformer startups still struggle with how they are regulated and their legal status appears far from settled. For example, Uber is making headlines as news outlets report alleged criminal acts by the company’s drivers. Last month, Uber reportedly paid $28.5 million dollars to settle a consumer class action that claimed the company was misrepresenting the rigorousness of its drivers’ background checks. Uber’s background checks are allegedly completed in as little as 36 hours.

    Similar safety concerns led Massachusetts Governor Charlie Baker to propose a bill that would increase regulation of Uber by requiring drivers to undergo an additional background check by state regulators.

    Cable acknowledges that reformer startups have “hit some bumps in the road,” but argues that the successes or “regulatory truces” have allowed the companies enough room to grow.

    Cable concludes his paper with “cautious optimism” about reformer startups. He hopes that these companies can usher in a new era of regulation that promotes competition in regulated spaces, but he also says that innovation cannot be prized above the public’s health and safety.



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