Why can’t regulators think like founders?

Etaine has been interning with us this winter as she wraps up her MBA at the Tuck School of Business (Dartmouth) in the US. She started her career as a regulator at the Financial Conduct Authority, advised fintechs, financial institutions and investors at policy consultancy Flint Global before her MBA, and spent this last summer with one of our portfolio companies, Infact. Her experience navigating these worlds shaped this piece.

When I joined the private sector after the FCA, I had a few culture shocks. The biggest one? My first meeting invite, for an intro chat of … 15 minutes. ‘Oh, I guess time is actually money now’, I thought.

At a regulator, you internalise that the risks of messing up are high, whether it’s writing an email to external stakeholders or creating a whole new regulatory framework. As a graduate, I learnt to take it slow and go one issue at a time. Later on, I had to unlearn some of that.

By now, I’ve sat on all sides of the table - regulator, adviser, operator, investor. I’ve heard how each side thinks about the others. This blog is an attempt to make those worlds feel a little less foreign to one another, and help bridge a gap that doesn’t need to be so large.

Regulators fear scandal

Action (or lack thereof) always brings the risk of scandal for a public organisation. They range from the small and trivial (does anyone remember the press coverage of FCA staff buying gaming screens as work-from-home became a Covid reality, when the UK stock of monitors dwindled down in just a couple days?), to larger ones, like the London Capital Finance collapse.

The democratic deficit regulators face massively hinders decisive action. Regulators aren’t elected: they take their mandate from Parliament, via Ministers. Policy decisions that touch on matters of **fairness, redistributing benefits or burdens to different consumer groups, require political cover that is hard to get. No one wants to be held responsible for the next scandal, face endless scrutiny at a Select Committee, or be reported on for anything at all, ever (bar making a really successful speech).

So policy decision-making processes are full of governance hoops. A policy framework slowly goes up a chain with multiple review points at different levels of the hierarchy even before it is being designed - as even time allocation to a specific issue is a decision in itself. Decision-makers across departments, and ultimately at the very top, need to be certain it’s the ‘optimal’ solution, not just the first one that was picked out of a hat - precisely because of that democratic deficit. Getting a green light requires multiple presentations, briefings, and back-and-forths at different levels of the hierarchy. Compounding this, a regulator needs to take into account various views from a diverse set of stakeholders - or else face accusations of regulatory capture. Optimisation with a sprinkle of risk aversion takes time.

Start-ups fear death

That mindset is the polar opposite of life in a start-up.

Recently a LinkedIn post popped up on my feed with the biggest takeaway someone took from a recent Y Combinator session: ‘Don’t die’. The sample of founders is full of risk-takers: founding a business can be one of the riskiest career decisions one can take.

VCs want founders to disrupt, think big and pulverise barriers with the teams they’ve built. Speed is tied to that - whether because it’s key to establishing defensibility, or simply because runway is fixed and you need to make leaps of progress to get to the next fundraise.

Founders take risks and go fast because they’re rewarded for it. Regulators’ form of upside is the successful avoidance of downside risks. It is this asymmetry of motivation that hinders dialogue between regulators and founders.

So, regulators aren’t thinking like founders. Duh?

Of course it’s an obvious point. Founders aren’t regulators, regulators aren’t founders (though I wonder what are the stats on that). They play different games, and that’s the way it works. But the consequences are real.

Speed gaps are tangible. As one example amongst many: Infact went from an idea to a fully-fledged, authorised credit bureau in a much shorter lapse of time than the FCA’s Credit Information Market Study started and concluded - changing the dynamics of the very market being examined.

As a founder whose life revolves around going fast, how could you not be exasperated with that pace? It has huge implications for raising capital and meeting the milestones that allows them to do so. Especially when it comes to authorisation: a slow regulatory pace doesn’t just mean that start-ups lose on precious revenue, it also means they have less time to deliver on the post-authorisation metrics that enables them to raise their next round, while runway dwindles down. At a more fundamental human level, we tend to see our own attitude and behaviours as the norm. It’s difficult to comprehend why that pace is what it is, when the contrast with your own organisation is so stark.

It’s doubly hard when it’s not obvious what the opportunities from starting a dialogue with the regulators might be. It took me moving to the other sides of the table - first in advisory, then in start-up and venture - to see how opaque the policy world looks from the outside. Most people are not well-versed in regulatory speak, even those operating in regulated markets.

That frustration matters, because it discourages much-needed interaction with policymakers. Why bother when they’re so slow, and you have so many other things you could do with your time? But regulators rely on external stakeholders bringing them the information they don’t have access to, so that lack of interaction leads to poorer decision-making.

That’s only compounded by the fact that big corporates are just better set up to engage. They have dedicated individuals who understand the policy world and whose responsibility it is to read the footnotes, think about who to engage, and carry out those interactions. On the other side, founders fight fires on every front and constantly struggle with bandwidth. Needless to say, we have a bit of a problem when those attempting to create tomorrow’s world aren’t as engaged as the incumbents.

What’s there left to do?

It’s not to say some within the regulators aren’t aware of the disconnect and trying to remedy to it. Studies will be commissioned, innovation departments launched and sandboxes created to support start-ups and foster some dialogue. Similarly, many start-ups navigate the regulatory and policy world expertly and make it a competitive advantage.

But we need a hell of a lot more than the few exceptions that confirm the rule. Regulated markets are regulated because they matter, and for the same reason, they’re where we find tomorrow’s winners. If we want to be genuinely supporting innovation in the UK, we need an ecosystem designed to systematically and sustainably support it.

Start-ups and regulators play fundamentally different games, and that will always be the case. But without interpretation, two parties speaking different languages can’t engage in a real conversation. So, we need interpreters. Turning isolated success stories into repeatable outcomes requires intermediaries who get both sides, their incentives and their constraints, and can translate from one part to the other. Intermediaries shouldn’t be gatekeepers, or substitutes for regulators - but they are an essential component of a successful innovation ecosystem.

Form has been investing in regulated markets for the last six years, and has been making the case for founders and for innovation since day 1. That’s precisely why I joined them. They have a unique understanding of the interactions between policy and the reality of a founder’s life, and they combine that edge into investing insights, portfolio support, and advocacy alike. Over the last 10 weeks, I’ve been exploring new ways Form could leverage that unique position - watch out for exciting things to come!