The Regulatory Fault Line For Startups Moves To Washington

Editor’s note: Ron Klain, a former high-level White House aide in the Obama and Clinton administrations, is general counsel of Revolution LLC, a Washington-based investment firm. 
For the past few years, the most visible friction between startups and regulatory agencies has been on the local level. Venture capital “unicorns” like Uber, Lyft and Airbnb have been battling municipal regulators and officials as they transform travel, transportation and other industries largely in the purview of local government. But this regulatory “fault line” is about to move. The most visible conflicts between startups and the government in the next two years will be in the nation’s capital, not in city halls or state houses.
Recent developments in Washington, especially the Obama administration’s greater desire to flex its regulatory muscles in several key areas, mean that some booming startups will have to navigate new governmental hurdles in Washington ,D.C. Four areas stand out for particular attention in the next few months.

Drones

The general population thinks of drones as weapons of war, or toys used by pesky neighbors for snooping, but the potential for a domestic drone industry – to revolutionize agriculture, industry, shipping, and commerce – is enormous. Other nations are moving quickly to capitalize on the promise of this new market, but regulators in the United States have been less friendly to commercial drone use.
On February 15, the administration proposed new rules to liberalize commercial drones, but they remain restrictive and fail to permit many innovative applications of drones (including drones piloted by remote cameras, a critical dimension to allowing drones to achieve early wins for users in agriculture and industry). As with many other technologies, if regulators limit their use in a country, innovators are likely to take their manufacturing facilities elsewhere.
In the months ahead, expect a contentious debate over the new FAA rules, as startups battle regulators over the acceptable contours for the use of this budding technology, and advocates complain of a loss of U.S. drone leadership to other nations.

Financial tech

One of the hottest venture-backed asset classes, the dizzying array of fintech firms offering new ways to provide equity or debt capital to businesses and consumers will see scrutiny from some of the most well-respected regulators in the Obama administration: Mary Jo White and her colleagues at the Securities Exchange Commission (SEC) and Rich Cordray and his team at the Consumer Financial Protection Bureau (CFPB).
Already, the SEC has delayed rules for crowdfunding by more than two years due to investor protection concerns, creating tension in the startup community anxious to have access to this new source of capital. New disputes will center on lending and consumer financial products.
In late February, the president announced new rules to crack down on conflicts of interest in financial advice – startups and mobile apps providing such advice are an emerging fintech area. Moreover, with the CFPB coming after payday lending and prepaid credit cards, fintech firms that offer services similar to these may find themselves in the regulators’ focus before too long.

Medical devices and genetic testing

These two areas ripe with startups have long complained about the length and difficulty of getting Federal Drug Administration (FDA) approval to get to market. But this festering conflict is likely to grow even more acute with the departure of FDA Commissioner Peggy Hamburg from the agency last month. While Hamburg had her battles with startups – her conflict with genetic testing startup 23andMe caused a major rift between Silicon Valley and Washington – the absence of a confirmed leader for Centers for Disease Control and Prevention (CDC), and the potential for a long and contentious process to replace Hamburg, will likely mean inaction at the agency and less progress toward innovative approaches.
Republicans on Capitol Hill have been signaling that they may propose legislation to speed up the FDA approval process, but whether such a bill can pass Congress is in doubt – and whether it would obtain the president’s signature is even more questionable.

Privacy and cybersecurity

To paraphrase an old saying, for a long time, privacy and cybersecurity have been like the humid summers in Washington: Everyone talks about it, but no one does anything about it. That is about to change.
The high-profile cyberattack on Sony, coupled with the repeated stories about consumer data breaches at major companies, has amped up concern at the White House and has led the administration to press Congress for action even more strongly than in the past. The president’s first ever Cybersecurity Summit in Silicon Valley this month was evidence of this, and more is likely to come.
Any firm that takes this lightly will find itself on the wrong end of a sharp action by the administration – and if Congress does not pick up the pace, it too will pay a political price. For startups who have privacy and security solutions, the renewed interest in Washington, D.C., will be a good thing; for those who think they can just slide by, they will be held up to unpleasant scrutiny and consequences in the policy process.
With 20 months to go in President Obama’s term, look for the administration to increase its activity in these four areas and find more instances of both cooperation and conflict with the technology sector. The policy/tech fault line will be in Washington, D.C. – and it will offer more promise and peril than it has in a long time.
Note: The views expressed here are those of the author. Revolution has investments in several sectors mentioned in this piece, but no companies specifically referenced.

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