Regulation and Innovation
2 min read

Regulation and Innovation

Paradoxically, regulation can sometimes result in innovation. Within highly regulated industries, you often get entrenched businesses and monopolies ripe for disruption. While regulation and red tape may strangle fledgling startups, if they can struggle through and overcome it they have a distinct advantage -- less competition.

What's more, regulation is often 'hackable'. Look hard, and you'll see lots of startups out there flirting with grey areas and testing the boundaries. Often it requires a startup environment to think outside the box when it comes to interpreting and applying regulations. Most don't like to talk about it for obvious reasons.

The are three industries that are great examples of this phenomena at work: drones, bio-tech and payments.


Commercial drones and quadcopters are an exciting area, and the use cases for them are endless. I went round a startup called SkyCatch the other day, who are working on a swappable battery station for drones and algorithms for crop monitoring. Other startups are working on delivery and logistics, as well as arial photography and monitoring.

The tech is fascinating too. By triangulating more satellites and a signal from a base station, you can increase GPS accuracy from half a meter to half a centimeter. Modern drones include advanced accelerometers, sim cards and long-lasting batteries.

How about the regulation? Well, you can legally fly a drone away from airports and under 400 feet. However, commercial use of drones is currently illegal under FAA regulations.

The FAA are due to rule on the specific guidelines for UAVs in 2015, and will try to balance privacy, safety and consumer demands. Depending on that decision, a whole market could be either destroyed or revitalized. Until then, it's a lot of grey area.

Medical startups

A whole crop of startups are innovating in bio-tech and medicine, from DNA sequencing to creating Human APIs. Imagine giving people more information about their bodies, diagnosis before symptoms,
and collecting enough data to draw correlations useful in research and diagnosis.

I'm incredibly interested in this area, and I feel it's one of the more meaningful pursuits in Silicon Valley. There's a lot of potential for innovation, but also just as much regulation.

HIPAA is the regulation governing health data storage and transmission, and a regulation that most medical and health startups will eventually run into. The folks at HumanAPI have put together some more information.

In addition, if anyone is making medical decisions from your products, then you've got to deal with FDA approval which can take a few years, not to mention being extremely pricy. It's definitely hard to get started in this area without outside capital.

Scanadu, a tricorder which scans your basic vital signs is taking an interesting approach by crowdfunding their initial batch of products. The participants will effectively be part of a closed trial to gain FDA approval -- quite a neat hack.


Payments are overseen by a combination of both private and government regulations, which can make it extremely tricky to get started in this area. That said, again a lot of innovation. You have Stripe, Square, Venmo and Simple to name just a few startups doing interesting things in this area.

As for regulation, first you have PCI compliance, a proprietary standard regulated by the main card networks that governs card data transmission and storage. Encrypting card numbers, using SSL, and not storing the CVC are just some of the requirements.

Then you may run into state and federal requirements, such as money transmitting licenses and know your customer due diligence. And all that's not to mention the the regulations that the banks impose on merchant accounts!


The key thing is that all this regulation leaves room for innovation. Paul Graham expands on some of these ideas in his essay on Schlep Blindness, where he talks about entrepreneurs being blinkered to certain industries and opportunities. As an entrepreneur, being able to put up with all the regulation and deal with unsexy industries is a distinct advantage.

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