If you’re in the business of using technology to change the way a traditional sector works – insurance, lending, law, and so on – then you’re in the business of working with regulators. There is no way around it. So, how can you work them most effectively? And, to take it one step further, is there a way to innovate with regulators?
Sam Hodges, Cofounder and CEO of Vouch Insurance, believes there is. At Vouch, Sam is focused on providing innovative startups and growing tech companies with insurance tailored to their needs, helping them manage their biggest risks so that their businesses last. Previously, Sam co-founded and led the U.S. arm of Funding Circle, the world’s leading marketplace for business loans. He has held numerous operating and investing roles in financial services, so he is as familiar as one can get with building in regulated industries.
“Disruption tends to hit less-regulated sectors first -- digital media being a good example within tech ,” explains Sam. “There is more latitude to innovate there. Innovation and disruption then moves into more regulated areas, and here you need to be more mindful of mindfields and constraints.”
At Vouch, the team hasn’t run into any major red tape thus far, despite building in a highly regulated space and seeing record growth with a current valuation of $550M. This is rare for the insurance industry, as there are regulations at both the state and federal levels with things varying state by state, creating a myriad of licensing requirements to comply with.
In our latest Innovator Series, Sam shared why they’ve had a fairly smooth regulatory process and provided three recommendations for founders building in traditional sectors:
From day zero, know who your regulators are, which regulations you need to pay attention to, and what the most serious traps are. Certain states are more detailed than the others. Know the aspects of your business regulators are going to care about — like safety concerns, the way your product is marketed, licensure, and so on.
Then, get honest with yourselves: does your product or service operate in a grey area where laws are ambiguous? Or are you clearly going out of line? If you do x, how will it be perceived? Sam advises that founders find outside counsel and get their honest opinion as early as possible in order to gain deep knowledge of your landscape.
A lot of regulation didn’t anticipate the internet. For example, much of the U.S.’ securities regulations was written between the 1930s and 40sresulting in a lot of grey area. “Sometimes it’s ok to play in this area and find a seam where you can safely innovate,” explains Sam. “However, I’m a believer in having proactive conversations with regulators. Explain how your model works, why it’s beneficial, and what you plan to do to stay on the right side of the intent of the law. If you do this, the tone of your conversation changes, and allows the legal and compliance teams to think in advance about how they can support you.”
In a recent Forbes article, Tendayi Viki explains that “the one thing that legal and compliance teams hate about innovation teams is being treated like a box to tick at the end of the innovation process. Innovation teams should engage with them at the beginning of their projects, during the value proposition and business model design.”
When you're having these conversations, be willing to get into the details of why they do things the way they do. That way, together, you can explore what is true and what is open to interpretation. From there, you can start to innovate together.
Whether its licensing requirements for the entity you're using to sell your product, or regulator dimensions that are box ticking and compliance related, if you bake these into both your thinking and your product roadmap, you’re way less likely to run into trouble later on.
Know your industry and regulators, and build relationships early on, and then you’ll have the ability to treat regulations as another product design parameter as you build and architect your solution. This is simple, and will keep things smooth.
“There are a lot of startups that have chosen to ignore regulations as they build, and deal with ramifications later,” explains Sam. “In some cases, this has worked for the company. In others, it has hurt their growth.”
Ride-sharing companies, for example, took an aggressive stance with respect to municipal regulations and found areas where they could innovate, in many cases without explicitly breaking the law. This allowed them to grow quickly and get to a place where most people preferred to have Uber and Lyft than not, which gave them leverage in later conversations with regulators. This path worked for them because they were dealing with lots of small disempowered regulators and they had public opinion on their side – a powerful thing for companies to have as they manage these issues.
Juul, on the other hand, managed their public opinion poorly by selling to younger people, and this put a giant target on them. “In an alternate universe where they had positioned their product as a better, safer, healthier alternative to smoking, they might have been OK,” Sam explains. However, they haven’t navigated regulation and public opinion well, and they are bearing consequences from that.
“It’s up to the founding team how they want to approach it, however in my view and experience it’s way better and easier to work with regulators than against them.”
At Forum, we have a peer-community of enterprise innovators that are working within the constraints of long established ways of doing business. We asked Sam how they can approach working with internal regulators.
“A lot of principles applied to startups are the same for enterprise innovators, with one important modifier,” explains Sam. “If you're already a big successful company, the reputational risk is a lot higher, so that makes innovation with a regulatory dimension harder.” Often the gatekeepers and protectors at these companies – security, compliance, procurement, general council office – are more careful here than if they were at a small company, since they will only get attention when things go wrong. Be mindful to get buy-in from the parts of the company that can easily turn things off, and do this before you start to build.
How do you get buy-in from these people? “I’ve been lucky to have worked with creative people in these roles,” Sam said. “If you can, look for people with a problem solving mindset rather than a rule following mindset. Those who know the difference between a white line and a grey line. The best lawyers and compliance people are the ones who know how to balance these pieces of their job.”
When innovating, you have to move fast, be scrappy, and encourage ideas. And, you also have to realize that laws apply if you're doing something that is clearly a regulated activity. Include this in your product thinking and think about it early on, engage regulators early, and you’ll have a better chance at a smooth, or closer to smooth, process.
Watch the recording of Sam Hodges on our Innovator Series here.