Regulatory Required vs Unpredictable Startups

Published: by

When looking at starting a venture, most entrepreneurs and investors tend to categorize the type of industry and the requirements for success. Commonly used differentiators are retail vs corporate, direct vs indirect sales (eg the Facebook model where the actual users are different than the paying advertisers), capital intensive vs light (eg chip design vs web services), etc. Many investor groups explicitly focus on one or more differentiators, since they know the requirements for success.

Another factor often used is regulatory sensitive vs independent. For example, bio and Pharma are regulatory required, whereas LinkedIn and Intel are independent. Of course, over time, as any industry grows, we can reasonably expect regulators to try and control it, but at it's early stages there is no regulation, and for many years thereafter only light.

Even regulatory required industries can generally rely upon a certain set of rules. If product X meets all of the requirements, it will be approved.

In today's Jerusalem Post, Gil Troy wrote an article on Arava Power, and its travails with government approvals. While I am mostly neutral on solar - if it works and is cost-effective, use it - Israel, with it's almost unending intense sun, especially in the Arava desert, would seem extremely well suited to solar.

Yet, as Troy writes, the industry is being stymied by government approvals. Unlike even Pharma, solar needs many layers of approval for two reasons:
1- Land. The panels need to be placed on large tracts of land, which always requires signoff, especially for something that is not a house or factory.
2- Power. The power industry is one of the most heavily regulated in most countries.

Thus, unlike bio and Pharma, which require approvals but have a well known process, and can be called regulatory required, and unlike even defense firms, who sell into government but have many governments and independent agencies and customers, solar is "regulatory unpredictable." Without regulator signoff, in an area where existing regulations do not address the issue and there is no predictability, a venture can be stymied from the get go.

More than anything else, such industries - green, black, purple or anything in between - require, like Pharma, a well known and designed regulatory process, so they can move from regulatory unpredictable to required.