The Regulated Market Opportunity in VC
Welcome back to The Form Playbook, our newsletter supporting founders building the future of regulated markets. This month we’re switching things up with a blog from us, dispelling a few myths about regulated markets.
This month:
📰 News & Views: UK Spring Budget recap, inc. progress on our campaign to protect start-up R&D support
⏰ Form Updates: Mayowa joined the Riding Unicorns podcast, while Leo discusses mental health startups with Insider
The Regulated Market Opportunity in VC
If you’re looking for outsized venture returns, should you stay away from markets that are:
Enormous
Largely undisrupted
Dominated by technologically inept incumbents, with low customer NPS?
Some investors seem to think so. One large, US LP even quipped “aren’t regulated markets the opposite of venture?”
We disagree, which is why we’re focused entirely on what we call the ‘Future Of Regulated Markets’ (😉). Here’s why:
What we mean by “regulated markets”
For us, “regulated markets” are those where a company’s journey will be meaningfully shaped by politics, policy or regulation. These are not just ‘regtech’ startups. Instead, regulation might be relevant because you need a licence to operate — think fintech or health — or because you’re building in an entirely new market where the policy framework is still taking shape, like carbon markets or cultivated meat.
Why regulated markets? The theory
We focus on these markets because there is enormous opportunity, from a venture perspective:
In existing regulated sectors, high barriers to entry mean these markets are often largely undisrupted, creating enormous opportunity for those who do succeed
These barriers have also insulated incumbents from competition, often making them weak and technologically inept, with customers who can’t wait to switch
In new markets, especially those which governments want to enable, early innovators can define how the sector evolves and shape how the regulatory framework develops
While taking on any market shaped by regulation is difficult, this can also mean you often have fewer competitors from the get go
Undoubtedly, policy and politics can be a barrier to innovators, but the best startups actually leverage the relationship with government, regulators and policy-makers to win, gaining an advantage that you (obviously) can’t access in regulated markets. This is especially the case in Europe, where tech and governments tend to be more collaborative than in the US.
Why regulated markets? The evidence
We’re in the game of trying to back outliers. As of the beginning of this year, these are the unicorns that have been built in the UK. 80% are in markets where regulation is make-or-break.
Winning in regulated markets, as a VC
Our belief at Form is that the UK (and Europe) continues to be over-indexed in tech outliers in these regulated markets. So how do you win here? You need to:
Properly diligence both regulatory risks and opportunities, instead of just writing companies off or lining up behind fickle tailwinds: Pricing regulatory risk properly means sometimes screening in deals that other investors run away from; sometimes screening out deals where other investors don’t see the risk. And it definitely means not just lazily investing behind supposed tailwinds that may be here today, gone tomorrow.
Genuinely help to move the dial on founders’ regulatory challenges and opportunities, so companies can still move quickly despite operating in a complicated market.
That’s why we are building Europe’s only fund focused entirely on backing the best founders and helping them plan the best route through these sectors. Get in touch.
News & Views
Last week’s Budget contained several announcements relevant to startups. Here are 2 highlights we’re most excited about:
R&D tax credits: We are pleased to see new support for R&D-intensive startups, which followed campaigning from us, Coadec, the BioIndustry Association and many others. This means that companies with at least 40% spend on R&D will be able to claim back 27p for every £1 spent on R&D. Unfortunately, this is less generous than the previous regime (~33p), and does not account for companies’ share of R&D spending falling as they scale. The government is also considering whether it will merge the SME and RDEC (for large companies) schemes from next year, so there may be further changes in future.
Regulatory innovation: The UK has allocated £10m funding for the MHRA to accelerate medicine and medical device authorisations, committed to set out a clear IP policy to enable AI companies to mine data used for training models, and announced a new, multi-regulator AI sandbox, which we hope can be a wedge for broader, cross-sectoral regulatory innovation. To that end, Dame Angela McLean, the Government’s new Science Adviser following Sir Patrick Vallance’s retirement, will also report on a new ‘growth duty’ for regulators by the Summer — as recommended by our good friend, John Fingleton.
Form Updates
Mayowa was on the Riding Unicorns podcast, sharing her journey into VC, how we think about founder appetite, and how we help founders shape winning regulatory strategies.
Leo spoke to Business Insider about mental health startups, highlighting how Thymia analyses voice, facial and response-time biomarkers to aid mental health support and diagnosis.
As always, if you know anyone building the future of regulated markets — or you’re an investor thinking about how policy affects your portfolio, get in touch.