Unclear regulations are holding back startups

On today’s What’s Working in Washington EXTRA episode, we discusses the D.C. region’s business environment, the regulations that pick winners and losers, and how the private and public sectors interact to create a place for entrepreneurship in the area. For this discussion we’re joined by Suzanne Rich Folsom, an attorney and expert in helping businesses comply with regulation; Richard Levick, founder of strategic communication and public affairs firm Levick and regular columnist with Forbes; and Michael Avon, a leading entrepreneur and venture investor in the D.C. region, and founder of ICX Media.

ABERMAN: Let’s just begin with: what do you think of the current regulatory environment for business? Richard, I’ll start with you.

LEVICK: Thank you, Jonathan. I think that it’s a complex and difficult environment right now. Small companies, I think, find extraordinary challenges, but we’re also seeing challenges for large companies. The merger mania that we’re starting to see, a continuation of the trend, I think continues to raise serious issues for the workplace, issues about creativity, about ingenuity, about global competition.

ABERMAN: Suzanne, you’re most recently involved in U.S. Steel, but you’ve been involved in a lot of prominent companies that really are affected by which way the regulatory wind blows. What do you think about the current environment?

FOLSOM: I think the current environment is good. I think that the reduced regulation has really helped a number of businesses, and I think that when you look at economic growth, you have to look at the three drivers. So you’re looking at reduced regulation, tax reform, and you’re looking at psychology of investing. Do the investors have confidence in the economy? So I think, obviously, there are some businesses that may not feel that way, but overall, I think, for big businesses as well as for startups that I been involved with as an advisor.

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ABERMAN: So you’re working with startups right now, I know, for example. I’ll turn to Michael Avon in a second, but from your standpoint, having worked with larger companies: you know, they look at regulation, I suppose, a lot of regulation tends to at least seem like, why are you picking on me? Is that the way a lot of bigger organizations look at regulations, like, this is a thing that pushes against my efficiency?

FOLSOM: I think there’s definitely a number of the operations folks that feel that way.

ABERMAN: That’s my sense, too. But now that you’re working with startups, at this particular moment in your career cycle, do you find that the conversation of regulation is different with a startup than, say, when you’re talking with the CEO of a large company like AIG or a U.S. Steel?

FOLSOM: It really depends, I think, on what type of startup. Fintech versus a startup in another area. I’ll give you an example. My daughter just graduated from a high school here that has an entrepreneurship startup program. So, when I was speaking, and they have startup leaders come in and and give these kids guidance and counsel with their own companies. And I was speaking to a minority business owner who had applied for an SBA loan. Couldn’t get it. Well, after tax reform, he could, because it changed the dynamics with respect to, you know, his bottom line, and he was able to apply. And so, it made a difference to him. So again, I think it’s about what type of startup have, you know, where you are in the process.

ABERMAN: So, your feeling, I guess, is that what you see is from where you sit? Michael Avon, I’ll turn to you, because right now, your most recent startup, I think, is a very disruptive business in the media industry.

AVON: It is, we hope so, at least.

ABERMAN: Media is certainly an industry that is still regulated. As you look at it from the standpoint of a startup, what’s your view?

AVON: Yeah, I think it’s a strange environment for startups right now. In some ways, the regulatory environment is good, I think that both administrations, the past administration and current administration, have made some effort to make the world easier for startups. At least, they’ve planned to do that. At the same time, we’re dealing with incredible uncertainty.

And I think all businesses are, but I think that sometimes affects startups more, where you just have less room for error. It’s very unclear to us, for example, what the current immigration regime is. We have multiple people in our business who are non-citizens, and it feels like the rules are changing on us every week, and very month, and there’s just a lot of uncertainty. And these are really critical people within our businesses, that help us drive other hiring within our business. These are people we can’t otherwise find, and you know, when we just don’t know what the rules are, day-to-day, week-to- week, month-to-month, that can be difficult.

The anti-trust environment with mergers is incredibly complex. I don’t think there’s anybody in media that can really tell you what the current philosophy is, when you look at the major media acquisitions that are currently in review. It just seems fairly haphazard, as to when the Justice Department or the FTC try to block mergers and acquisitions, and when they allow them to happen. And for a small company like ours, it makes it just really difficult to figure out how to plan.

Are you going to end up, if you’re partners with two different large media companies that are trying to merge, are you going to end up working with one company, or is it going to be two? Look in the case of, for example, AT&T and Time Warner, and we still don’t know for sure. Even though it looks likely that’s going to go through. That’s difficult when you’re a startup, because we’re very reliant on some degree of certainty, in what’s otherwise a very uncertain world in the startup.

ABERMAN: Is that one of the biggest differences, Suzanne, and as you look at startups, and working with startups vis-a-vis large public companies, If you’re a startup, is the government more like a referee? Sort of off in the ether someplace? But startups don’t really interact with government, and try to shape policy in the way a large company does, right?

LEVICK: Well, Mike, I think the point you raised about uncertainty is so powerful. From Ronald Reagan on, antitrust, I think, has been a real conversation, largely because we’ve seen largely the due regulation over most of the last forty years, with a little of exception of Clinton and Obama, but not much, because of the recession.

But I think the uncertainty and the disruption are even more powerful factors now than government regulation, for the most part. In the totality of government regulations, and its layered thickness among states and jurisdictions, and obviously federal has a human impact. But the uncertainty makes it hard at every level. You talk to the Washington lobbyists, as you talk to the Washington attorneys, we used to know where the goal line was.

Trying to do representation of nation-states, of sovereigns, is so much more difficult, because you don’t know where the White House is, you don’t know where Congress is going to be. In terms of disruption, the commodification of the new thing, the new shiny, is so extraordinary that for small, medium, and large businesses, you can decide to invest in something new that looks extraordinary, and within two years, the cycles has already commodified it.

ABERMAN: What I’ve heard so far is that it’s a double-edged sword. The regulatory environment, in a lot of ways, is very favorable to entrepreneurship, but yet, the uncertainty of the political situation creates a lot of friction.

ABERMAN: Michael, from your perspective as a startup, you’ve done a few rounds of funding, you’re growing the business. What’s the political environment do to a startup?

AVON: We don’t think about it every day, but it affects us lot, and you know, as a startup, you don’t have the resources internally to comply with new regulations that come online every day. We struggle to do everything within a startup. As I say, the CEO of a startup is head of sales, head of business, you know, cheap dishwasher, everything in between. And certainly, we don’t have the luxury of a large legal team. So, we think a lot about how we can comply with all the regulations in front of us, and also build up a business, hire people, become a profitable business. You know, and how we can do that in the most efficient possible way.

And everything from tax policy to privacy regulations to antitrust ends up affecting us. We have to certainly comply with all regulations, but at the same time, we can’t get consumed by complying with regulation. We have to focus on building up a business and scaling. So we’re too small to have lobbyists. we’re too small to spend time on the hill. We just don’t have the time to do that, and at the same time, I fear that startups as a whole really aren’t being represented as much today as maybe they were ten years ago, in the conversation.

We create, together, most of the new jobs in the U.S., it’s a real competitive advantage in the U.S., the startups we have, and we’re losing some of that competitive advantage globally. And I worry sometimes that we’re not being represented. We certainly don’t have the money to throw it at the system as some larger companies do.

ABERMAN: So, as a practical matter, if you’re doing a technology startup, the way the political issues and regulatory governance and where things go on the scale of what we do, it’s more of an environmental issue rather than a direct dollar and cents issue, is what I’m hearing. Suzanne, it strikes me, in your world, going back to working as general counsel, and being part of managing large organizations. There’s a significant dollar and cents benefit when regulations are cut, right?

FOLSOM: Absolutely. And that’s why I said that the business environment is better for many big companies.

ABERMAN: Could you give me some examples of recent policies that are really helping business right now?

FOLSOM: Environmental. A number of the environmental changes, and when you think about the teams that corporations have had to put in place, you’re not just talking about more robust legal teams, but compliance teams that deal with federal issues, state issues. In addition to your government affairs folks. And these are teams that, in some companies, number in the hundreds of people, and people have to stay up to date.

And if you’re operating in other countries, then you have to be on top of those regulations as well. And I remember back, when I went in to Stacia Kelly, who was the general counsel of AIG, who recruited me after the material weakness determination to be the chief compliance officer, regulatory and compliance officer. And we went in, and we were looking, and AIG was in 145 countries, and all of a sudden, we have regulators from around the world that want answers, want questions. I mean, you need a really big team to be to deal with responding to people in a time of crisis, but also in a time of relative calm, when there are myriad regulations.

ABERMAN: And it seems to me, and it’s interesting, you mention AIG, I think about Sarbanes-Oxley, I think about Dodd-Frank, I think about environmental rules, and it seems to me: Richard, you’ve been involved in this for quite a while in different ways. It seems to me that what often happens is, politicians find a red meat issue for a base, or find an issue that gets people to exercise, and they sort of grab the stick, and they try to create rules to get to an outcome, and they raise complexity in business. Is that a fair comment?

LEVICK: I think it’s accurate. You know, in Washington, no one wants to be first, but everyone wants to be second. You saw the recent Facebook hearing in the United States Congress, both in the Senate and the House. Much different than they were in the UK Parliament, where I believe Mark Zuckerberg not only did not go, but they sent one of their senior lawyers, and I think he’s still in therapy as a result that appearance.

But here, with the Sacramento Bee I think with the best headline of the hearing, said it’s the grandpa versus the tech guy. And they weren’t interested really in laying a hand on Zuckerberg, they were interested in piling on. Because in Washington, why kick a man while he’s up? It’s too much work. So yes, you know, it’s all about looking at the hot button issue when starting to regulate on it. If I may, a couple of things here. I think what Suzanne said about international regulation is so important, and I recall working with you at AIG a decade go, and some of the things that were required in the United States, were per-se illegal in several countries during that, making it very, very difficult to comply, and of course creating headline risk.

Michael, you said something earlier, which I think is so extraordinary: up until just this past year, what you said is absolutely true, small businesses have always provided a majority of jobs. That is no longer true. I think the kinds of questions, Jonathan, that you’re asking about creativity, about ingenuity, about risk, those questions remain to be seen. My fear is, the larger these companies become, are we going start seeing the kind of customer service that we were so used to when AT&T was a monopoly, or we had a choice of one cable provider?

ABERMAN: It seems that where we’re going is, regulation that’s designed to get a political outcome raises the expense of business to the point where complying with the regulations rewards scale, and the big businesses are less efficient, they have to spend more money, and startups can’t get to scale because they can’t afford to comply. Do you think that’s a contributing factor, what Richard just said, that small businesses aren’t creating as many jobs?

AVON: I mean, I think it’s a major factor, and especially in heavily regulated industries like financial services, like media, like healthcare. Maybe healthcare is a little different, but if you look at financial services, and you look at Dodd-Frank, which I think was well-intentioned post 2008 collapse, but that led to a situation where only the largest banks could really comply, and then you saw a bipartisan agreement over the past year to change the rules, and actually really lessen the burden on smaller banks, smaller financial services organizations. And that’s helpful.

That cut both ways for startups. Dodd-Frank hurt smaller regulated startups that fit under the under the structure of Dodd-Frank, at the same time that allowed a shadow financial services industry to pop up and actually helped the fintech startup world. You see in media where privacy laws and rules are pretty unclear in the U.S. right now. We know that privacy is important, at the same time, we have this clear agreement between consumers and media companies that they get free content, in return for giving up some level of data and information about themselves.

And what is that, some level, is a very open question. And that’s created a situation where big behemoths can navigate these difficult, tricky and unclear regulatory environments, but it’s harder on startups. You risk destroying your business by making one false move as a startup, and it means that people are a little less likely to take risks, a little bit less likely to try to disrupt the status quo.

ABERMAN: I’m really fascinated with this idea of reducing regulation, but yet we increase scale. It’s an interesting conflict.

ABERMAN: You know, it strikes me that we have a really interesting issue here, which is government regulation. There are certain things where we just need to have it, but how do we balance serving the broader societal needs with not choking people’s ability to do business? How do we balance that?

LEVICK: Jonathan, you said something during the break, that I thought raises an interesting issue, which is that Washington doesn’t really work anymore. Ronald Reagan used to talk to tip O’Neill, former speaker of the house, and say, how do we fix this? The cameras are off, how do we fix this? They had this extraordinarily collegial after hours relationship.

The President was fond of saying, after five, we’re all one party, and that doesn’t exist anymore. And so, I think that what happens is, everything becomes histrionics. It’s much more difficult to have the kind of conversations that lead to the more molecular, the more clear regulation that I think Washington was, at one point, capable of.

ABERMAN: But if we’re just having a conversation about histrionics, then we’re not having the conversation about anything substantial, and then what happens is, companies can only manage regulation if they’re big, or antitrust laws are enforced in a way to make companies big, and pretty soon, where’s the creative destruction? Where is the ability for people to tip the apple cart over?

AVON: It’s really hard for politicians to understand how to best regulate for startups, for growing companies, for growth companies, when people won’t sit down and listen. So if everybody’s just yelling at each other, not just around politics, but spending all their time arguing ideology, they’re not sitting down with entrepreneurs.

They’re, for the most part, non-partisan when it comes to entrepreneurial issues. We might have our strong opinions on other things, but ultimately, we want an environment to help us and our peers in the market grow their businesses, and you’ll see remarkable consistency on what people want. It’s fair tax rules that are not overly complicated, it’s fair immigration rule that are predictable. It is fair smart regulation, I think just about every entrepreneur wants a level of regulation.

We all want to fly on safe planes. We all want to drink clean water. We all agree that there’s some level of protecting the environment, that’s certainly important. Certainly protecting privacy as well. At the same time, these have to be sensible regulations that are smart, that actually get to the point. And if politicians aren’t going to sit down and listen to those of us that are starting businesses, building businesses, and investing in businesses, building larger businesses, and actually understand what we deal with on a day-to-day basis, they’re going to have a hard time writing these regulations in a way that makes sense for startup businesses.

ABERMAN: You’re speaking from the perspective of somebody who owns his own business, or so forth. You have more control. I would think that with a public company, where you have the fiduciary duty to maximize profits, is the conversation different, when you talk with the CEOs you work with, or others, when you talk about regulation?

FOLSOM: No. I mean, CEOs of major corporations want want smarter regulations as well. The money that is spent by large corporations in order to comply is mind boggling. The board does have fiduciary duties, the c-suite does too.

So if, heaven forbid, you’re not on top of that regulation, and you fall out of compliance, because you have so many regulations that you’re following, and you have operations all over the world, it can be detrimental to the company, then you have a crisis situation, and sometimes companies end up in those situations because they failed to follow, and the blame is on them, and other times, you know, it was inadvertent that they ended up in that situation.

And then that causes reputational damage, and people like Richard have to get involved, and you’re dealing with a crisis, which then costs the shareholders in the company even more. I really do believe that we need regulations in certain industries, and smart regulations, but I think as our politicians go through this, they need to have the conversations that Richard and Michael are talking about, and try to walk in the shoes of the businesspeople, if they’ve never had that opportunity, and listen to those business folks.

ABERMAN: Do you think we have a situation now where, really. both political parties are so concerned with other ideological issues that neither one’s really getting down to what’s the proper role of government, and actually working with business to make it work right?

LEVICK: I think so. I think this is also, perhaps, the greatest challenge democracy has had to experience in this country perhaps since the Civil War, and I say that because as much as regulation and the ability of government to impact business and regulate business, what we’re just at, the most nascent steps of, are artificial intelligence.

And we’re seeing that with truck drivers now, autonomous vehicles. We’re going to see the impact on white collar jobs, as we did in Detroit thirty years ago in terms of the change, the rapid change with robotics and international trade. But that is going to change the environment, and it’s going to happen very, very quickly. It’s going to affect law firms, communications firms, every business, and I’m not sure we’re in any way prepared for that. And AI may ultimately mean more jobs in the community, but I’m not convinced it’s going to necessarily happen in our business lifetimes.

ABERMAN: And more to the point, we need to understand how the technology works, and not think the internet is a string with a can next to your ear.

AVON: I think Richard makes a really good point, if I can add onto that. The only thing that makes me feel a little bit better is that we did get through something at least somewhat similar a hundred years ago, a or a hundred-plus years ago, with the Industrial Revolution, at the turn of the last century, where you had absolute upheaval. We built up structures. We went through a lot of turmoil, short of the Civil War, but a lot of turmoil in nearly early 1900s, particularly the 1930s, and we did eventually put a structure in place that worked, and gave us years of growth.

I feel like we’re in the middle of that right now. I think the only difference is, I don’t feel like politicians and society at large is really focused on the problem. I don’t think people understand what’s coming with AI, what’s already happened to the media, and financial services, and other industries through the internet. And I think that we’re fighting battles from fifty years ago, instead of looking ahead, where some other countries, certainly China and other countries, are very much focused on what’s coming next. And that’s what scares me the most, as an American, and as an American businessman.

LEVICK: And remember 1909, you’ve got J.P. Morgan, who creates the Federal Reserve, which stays off the Great Depression for another ten years.

ABERMAN: In fact, many people say he staved off the 1909 crash by putting up his own money. Just goes to show, a business could make a big difference. I very much enjoyed having the three of you in the studio, it was really interesting for me, and I’m sure the listeners really appreciate. And I’m reminded that it’s not ideology that matters, what matters is getting stuff done.