Here’s a Surprisingly Simple Reason that New Regulation Might Spur the Creation of More Startups

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Earlier this morning I wrote about a new study suggesting that new federal regulation doesn’t inhibit the creation of new startup companies in an industry. In fact, it might actually stimulate the creation of startups. This seems counterintuitive, but a reader with some experience in the education and health care sectors—which were influenced by NCLB and Obamacare, respectively—proposes an explanation for this:

Healthcare startups have absolutely exploded post-ACA….This was pretty well anticipated by venture capital; a bunch of Sand Hill firms started putting together ad-hoc health IT teams shortly after the ACA was passed, on the basic logic that anything that changed an industry as much as the ACA did would necessarily create a lot of startup opportunities.

I worked in education research shortly after the passage of NCLB, and while I can’t speak to this nearly as confidently as I can speak to the current healthcare startup landscape, it at least seemed to me that a lot of startups sprung up to help schools/districts/states etc. adapt to the new law.

The general principle I’ve taken from this is that federal regulation, or at least major federal regulation, changes the landscape of its target industries enough to increase startup opportunities, because incumbents are slow to adapt for all the same reasons incumbents are usually slow to adapt to change. Entrepreneurs and startup investors have a pretty good sense of that dynamic.

This seems pretty plausible. Any major change, whether it’s a technological change or a regulatory change, creates a new landscape. And big incumbents are usually slow to react, regardless of where the change came from. This gives startups an opportunity to dive in and take advantage of the change faster than existing firms.

This doesn’t mean that regulatory change is necessarily either beneficial or harmful. It might be generally beneficial on the theory that nearly anything which shakes up an industry ends up being useful. Or it might be generally harmful because startups addressing regulatory change don’t really add any long-term value. That’s a question for another day. Either way, though, it’s change, and that might be reason enough to expect an increase in startup activity whenever new federal regulations are introduced.

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Fact:

In-depth journalism that investigates the powerful takes real money and is so damn important right now.But it doesn’t take a Mother Jones investigation to know that billionaires and corporations will never fund the type of reporting (like they do politicians) we do that exists to help bring about change. Instead, our mission-driven journalism is made possible by people power, and has been for 46 years now since our founding as a non-profit.

In “TITLE TK” Monica Bauerlein writes about the perilous moment we’re in, and why it’s so important that we raise $325,000 by the time November’s midterms are decided so we can be ready to throw everything we have at the big issues facing the nation no matter what happens. Please help MoJo’s people-powered journalism with a donation today.

$400,000 to go!

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