Regulation: an Underestimated Danger to Startups and Investors

I have worked in many various industries that have a relation to regulation: concerning communications, the tobacco industry is merely battling a defensive fight. Everything is tightly regulated, from packaging designs to marketing channels and advertisement.

By contrast, the entire intercity bus market was only made possible by deregulation. The existing law had not allowed for operating intercity bus services in Germany. After the change of course in 2013, it has developed into a thriving new market with a product for new target audiences. The market was enriched and due to the increase in competition lead to improvements in pre-existent products, for example Deutsche Bahn.

Personally, I gained the following experience: deregulation and particularly competition stimulate innovation and are an advantage for consumer. However, regulation is also a forceful weapon against unwelcome competitors.

Regulation – Creating Markets, Holding off Competition?

Depending on the perspective, regulation can have different sides. Existing actors in markets can utilize regulation in order to ward off unwelcome competition or new competitors.

Regulations can constitute a barrier for new businesses, for example by causing high costs for the establishment of a product or for permissions of services. Once a product is active on the market, established companies – as well as politics – can advocate for new regulations in the respective market.

Using the example of the intercity bus market, this can materialize in the form of tolls, tightening of passenger rights, alignment of regulations regarding indemnification with railway companies (e.g. Deutsche Bahn) as well as provisions concerning wage and social security. This can effectively shift competition towards railways, while keeping the intercity bus market controlled.

Old Economy vs. New Economy?

Recently a confrontation occurred between a well-established insurance broker, respectively an insurance company, and a new innovative company that wanted to stir up the market with the launch of an app.

Starting as a minor contention, the issue becomes problematic for the innovative insurance brokers. Skillfully the “dinosaur” addresses the lack of transparency and information policy. Furthermore, the discussion shows slight undertones of a certain insecurity regarding the issue of data protection. The new innovative company successfully refutes these arguments so that the customers are not irritated; in the end, they are a different target group.

The actual addressee of the message is not the customer but the regulator. Consumer protection gained momentum during the legislative period of the Social Democratic Party (SPD) and tends to view consumer more unemancipated than before – with consequences for a variety of industries. All arguments seem convincing from the perspective of consumer protection – one more reason to carefully track public and covert communication.

Startups must not waive the agency of their own business model, but need to communicate more about themselves. Politics and administration are dependent on information, on arising problems, on solutions that are offered. It is vital to talk yourself about your startup rather than being talked about. That is why startups as well as investors need a certain regulatory risk management. Business models can be compromised, need to be realized later, or entail higher costs than anticipated. The loudness of economic growth tends to drown fine nuances: however, it is important that you listen to them closely!

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