Entrepreneurs versus regulators

Every election cycle rekindles private sector complaints about excessive Washington regulation. This year, a businessman as presidential candidate adds fuel to the customary fire. Yet, ever since the SEC failed to rein in the creativity of the financial services industry prior to 2008, the tension between innovation and regulation, between the entrepreneur and the regulator has been worsening. Entrepreneurs are getting bolder. Regulators are getting tougher.

Consider these examples: Blood-testing startup Theranos, once valued at $9 billion, voided all 2014 and 2015 tests on its Edison blood-testing machines, meaning thousands of patients received unreliable results and may have received incorrect treatments as a result. Another Unicorn, health benefits broker Zenefits, valued at $4.5 billion, was found to have used in-house software to enable salespeople to qualify for licenses in less time than legally required in many states. Meanwhile Airbnb tries to avoid racial discrimination and hotel safety rules being applied to its rental units.

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Innovation challenges the status quo and tests new boundaries. American consumers, more so than others, are willing to embrace change, give new a try and share their experiences via social media. This willing demand for novelty fuels entrepreneurship. Pressure from investors and the entrepreneur’s desire to be the next Steve Jobs can lead to corners being cut and consumer safety or privacy being compromised.

It is important to understand the very different mindsets of the regulator and the entrepreneur. The regulator is by nature cautious, protective and low-key. If the regulator lets an unsafe product come to market unchallenged, her career is on the line. She is subject to legislative oversight and media scrutiny. One consumer death caused by permitting a new drug to be marketed can be a career-ending mistake. Remember thalidomide.

The entrepreneur, by contrast, is risk-prone, not risk-averse. Getting to market quickly is critical to the firm’s success and, sometimes equally important, the entrepreneur’s hubris. This can result in a search for shortcuts and the overstatement of new product performance claims. It can also drive the entrepreneur to build consumer demand rapidly to hopefully make it harder for the regulator to call a time-out. Regulations (and, for that matter, corporate governance requirements) are seen as behind the times, obstacles to be circumvented rather than rules to be respected. Entrepreneurs often take a Benthamite, utilitarian view. For example, if 10,000 people change their lifestyles for the better in response to health risk information they receive from a 23andMe genetic test, do the benefits outweigh 10 people taking drastic, unnecessary, medical action when they receive their results? The same reasoning leads Elon Musk to describe Autopilot as a net improver of safety, even after a consumer death in the US and another accident in China.

The public is divided on the value of regulation. For example, in a recent poll conducted for STAT and the Harvard School of Public Health, 60 percent of Americans opposed loosening government safety standards to permit faster drug approvals by the Food and Drug Administration. A similar percentage wanted the FDA to do its own assessments of new drugs and devices rather than rely on any foreign government agency that may have already approved the product. Women, who are more likely than men to have suffered side effects from drugs, were more inclined to support existing policies. The division in public opinion is likely to grow. As consumer empowerment becomes an increasingly important trend in health care and other sectors, the pressure for consumer protection will increase just as more entrepreneurs seek to sell cost-reducing solutions direct to consumers.

Substantial geographic and social distance separates the Silicon Valley entrepreneur and the Washington regulator, leading to an us versus them mutual distrust. The entrepreneur is often characterized as a know-it-all genius, the regulator as a drone. But it is essential that they understand and respect each other’s world view. Regulators need adequate funding to stay current, to rewrite regulations and stay ahead of the technology curve rather than always be playing catch-up. Entrepreneurs need to understand the regulators’ essential role as protectors of public safety, privacy and intellectual property and their understandable inclination to “be better safe than sorry.” Health care start-ups in particular need to budget for chief scientific officers, scientific advisory boards and chief compliance officers early in their growth cycles. Both entrepreneurs and regulators need to work together and share data proactively to streamline regulatory approval processes without comprising the standards of scientific evidence that entrepreneurs must meet to win regulatory approval. Such collaboration is essential to national competitiveness, to rapid innovation and to consumer empowerment in the sharing economy.

John A. Quelch is the Charles Edward Wilson Professor of Business Administration at Harvard Business School.


The views expressed by authors are their own and not the views of The Hill.