Startups and public policymaking: a guide for early stage founders
At Form we invest in seed stage startups in ‘regulated markets’ , but what does that mean? We decided that the best answer is a guide for…
Have you thought about what public policy and regulation mean for your startup? You’ll be surprised by how relevant they are, even if you don’t think of your company as ‘regulated’. Read on for some basic steps you can take to better understand these risks and opportunities.
At Form we invest in ‘regulated markets’ but the term is much broader to us than it might strictly imply. We don’t just mean sectors where there is a formal, legislated-for regulatory structure, such as financial services or the utilities.
Our working definition is really: we invest where the decisions of public policymakers can have a material bearing on the success of a startup. We tend to use the terms ‘regulation’ and ‘policy’ interchangeably to refer to those decisions.
Founders thinking about how these issues might affect their startups can ask three questions, which we’ll take in order:
The ‘what’ — in broad terms, what type of market is my startup in?
The ‘who’ — which of the hundreds of government and related decision makers are relevant to our company?
The ‘how’ — what are the set of levers that policymakers can pull, ranging from funding right through to criminal sanctions?
After signposting you through these questions, the guide ends with some practical ways in which founders can get a handle on these issues — to mitigate the risks and seize opportunities they create.
The ‘what’ — three types of regulated market
We break markets down into three broad groups, in terms of the way they are regulated. The first step is working out which group your startup falls into.
A) Hard regulated markets
These are the classics described above. Startups often need a licence or permission to operate, have to report to a regulator, and may have their pricing, operations or finances controlled in some way by that regulator. Energy, financial services, some aspects of transport, the utilities, many parts of healthcare. When you think about it, the list is actually quite long.
Startups in these markets often have long initial prep phases — e.g. it can take a year for a UK fintech to become FCA authorised, before it can even make its first sale. But then they have a great source of defensibility versus markets where anyone with a laptop and an internet connection can spin up a competitor in days. This can put off some investors who are unwilling to finance that prep phase, or who are unfamiliar with regulatory processes and don’t feel comfortable with these startups as a result.
Many startups operate right at the edge of hard regulatory frameworks — for example mental health platforms which link users to support options, but don’t provide clinician-led (regulated) advice themselves. Or fintechs like Revolut which are regulated to do some things (e-money) but not others (retail banking).
B) Soft regulated markets
This is a more subtle group which we define as exposed to public policy and regulation, but not in the ‘hard’ sense described above. Take gig-economy based models, such as Deliveroo. The regulation of the labour market is changing so quickly in response to concerns about exploitation that there is real pressure on the fundamental unit economics on which these models were developed. But food delivery isn’t a regulated activity; there is no oversight body, or licencing, or reporting.
Another example would be “digital identity” startups. Startups looking to provide the “digital passport” of the future (e.g. Evernym, Passbase etc) are not regulated in the traditional sense, but if they are to genuinely become a trusted form of identity in the future, either government will be a buyer, or at the very least, policy and regulation will be crucial to adoption.
A third would be startups innovating around online safety. Though their products may not be regulated, they are likely to be selling to the public sector (central government, local government, police forces, etc) and the policy landscape is moving quickly. The UK is not alone in actively making rules around online harms, AI, age verification and more, and the industry is developing its own views through initiatives like OSTIA.
We tease out more of these subtle impacts below.
C) Frontier markets
Some markets are created or killed outright by the decisions of policymakers, whether they are actually hard-regulated or not. In the UK, e-scooters are illegal to use except on private land, but the government is fast-tracking legislation to legalise them, and local authorities will soon start piloting their use in towns and cities. All around the world, the e-scooter companies exist entirely at the discretion of national, regional and/or local decision makers.
But the opposite is also true. The world of crypto has been mostly unregulated to date, but jurisdictions and supranational bodies are defining the rules for the first time. This will lock in defensibility for some early movers, but kill others which fall on the wrong side of the line. Or mobile games that sell in-game ‘loot boxes’, which are not currently regulated but are facing the prospect of being regulated as gambling in many jurisdictions.
Drilling deeper
So we have our three groups, which are useful at a high level to bucket together types of regulated market. Working out which one your startup is in provides a good initial reference point. But they quickly become too high level to be helpful — when you stare hard, the picture starts to break down like looking through a kaleidoscope — sectors, business models, types of policy…
We need an idea of who is making these decisions, and how those decisions actually impact your startup. Only then can we get a handle on how this matters to your business and what you can do.
The ‘who’ — decision makers
The table below sets out a rough framework for grouping up policymakers, which demonstrates the breadth and complexity of our cast list.
The framework uses some UK-specific examples, but it more or less holds for most developed democracies.
Altogether, for a jurisdiction like the UK, we are talking in the region of 800+ bodies and tens of thousands of individual decision makers — albeit with very differing levels of influence over business activity. In more federal systems like the US, this number is many times higher given the addition of state-level decision makers.
So it’s not surprising that our ‘hard, soft, frontier’ model only gets us so far in thinking through how this array of policymakers drive outcomes for startups. This ‘who’ question takes us to another level of detail.
To go back to our e-scooter example, the legalisation will require the officials at the Department for Transport to draft legislation, at the behest of the Minister, to be voted on (or amended by) MPs and Lords in parliament. But critically it will also require, all around the UK, officials in local government and their elected bosses to decide how to licence the roll-out of e-scooters in their towns and cities: which companies can play and on what terms.
The ‘how’ — policy tools and impacts on startups
The final step in our process takes the analysis down to the level of ‘how’ the decisions of policymakers actually matter to startups.
We can borrow the ‘government as a system’ framework developed by the UK civil service as a way of establishing the means by which policymakers shape markets. The point here is that there are many more channels of policy and regulatory impact than the basic idea that “government makes rules we have to follow”.
The framework’s y axis runs from ‘softer’ powers, which are often collaborative and discursive, to ‘formal powers’ which include legislation, funding and prosecution. The x axis is less of a true axis and more a set of eight groups of activity, but they do range rightwards from ‘influence’ towards more direct forms of intervention such as ‘delivery’ and ‘control’.
Source: UK Civil Service. High resolution version here.
In total there are 56 ways in which policymakers can wield their power and influence markets. We’d suggest a 57th — taxing — which doesn’t seem to feature but which is clearly an issue for all innovative businesses (R&D tax credits; EIS; etc), and a big issue for some (e.g. those building business models around certain tax reliefs, such as Lunchr).
This array of tools function in very different ways, and only a small proportion are the kind of ‘hard’, limiting and sanctions-based regulatory powers that might come to mind when we first think about regulation and policy.
Many relate to piloting, funding, enablement, incentivisation, convening, contracting and other potential sources of support and opportunity for a startup. For example, several of our portfolio companies have pivoted during Covid-19 to deliver services on behalf of government, creating entire new strands to the business.
Even where those ‘harder’ powers are in play, their use might still be positive rather than restrictive — e.g. to dismantle existing oligopolies and incentivise new competition, such as Open Banking in the UK, which forces incumbent banks to allow third parties to access customer data.
And for all startups, the increasing hostility of competition regulators around the world to tech mergers is becoming a serious risk to exit by acquisition, and even to late stage financing rounds. Facebook’s acquisition of Giphy is the latest deal to fall under the gaze of the CMA in the UK, for example.
The key point here is that government decision making is complex and specific. It can be a source of opportunity as well as risk. It is a variable to be managed just like any other — product, team, unit economics, go to market, and so on.
Putting it into practice
So how do we cut through this complexity to something that you, as an early stage founder, can digest? Here are six sets of questions that founding teams can ask themselves to get a first, good sense of where and how policy and regulation might matter.
1. Start early — this could matter right now
What kind of market am I in, broadly — hard, soft, frontier?
Which of the 56 boxes in the framework above apply to my startup? E.g. do I have a sectoral regulator, or need any permissions or licenses just to get going — and what does this mean for my early runway?
Is my sector under particular scrutiny from policymakers, is it becoming “political”?
2. Think about opportunity, not just risk
Can I build defensibility by being smart about policy — e.g. getting a hard-to-get permission or licence?
Is policy change opening up new opportunities? Is reform reducing policy barriers or opening up incumbents to disruption, or are new public funding streams becoming available?
3. Find the shortest route to advice
Do I have investors who can help with this (or make an intro), or can I add this skillset to my cap table at the next round? (If you think Form can help, let us know!)
Can existing advisers — legal, PR — give at least an initial view on this for us or can I ask a policy or public affairs advisory firm for a steer? (Though most will need to be paid).
Can startup-focused policy groups (like Coadec and The Entrepreneurs’ Network, in the UK) or trade bodies point me in the right direction?
4. Look and plan ahead
How can I monitor policy developments on an ongoing basis? If the issue is legislative, most legislatures provide decent email updates; if less formal policy change, think tanks and others (campaign groups, interested twitter commentators) can be worth following.
Are there policy relationships I can invest in now? Perhaps you see an issue further down the road, or in a market on your roadmap; reach out now and engage, before you need to.
Can I policy-proof my product by pre-empting future policy changes in the way I design it now?
5. Start thinking about your policy brand
Can I describe how my startup solves a societal or a policy problem? If you are regulated then it’s because you’re in a market that ‘matters’ — so the answer should be “yes”.
Am I (or is my sector) getting big enough that my startup’s head is ‘above the parapet’?
Who is likely to advocate for me — and who are my sceptics — if my business or market starts to attract policymaker attention?
6. Take the policymaker help that is — increasingly — on offer
Are there sandboxes or other regulatory ‘front doors’ I can access, like the UK FCA Sandbox?
Is there non-dilutive grant funding I can access from public bodies?
More immediately, are there Covid-related government support schemes that work for my startup? (See here for our explainer of the UK Future Fund scheme).
These questions aren’t exhaustive, but they provide a great starting point for any founder looking to understand this dimension of risk and opportunity for their business.
We hope that every startup can see that policy and regulation is worth thinking about, even if only to rule it out as a major issue. At Form Ventures we think that these issues matter enough, to enough startups, that there should be a fund which specialises in backing these teams, and helping them understand and navigate them.
This isn’t typical VC territory, and in that respect we aren’t a typical fund. Beyond our venture experience we draw on a combined 20+ years of advising on public policymaking, both within and outside of government, as well as a unique network of LPs, advisers and supporters.
Find out more about us here, but most importantly, get in touch. We’d love to hear your questions, thoughts and challenges!