Regulation and the Revolving Door
A few weeks ago, a talk from Bill Gurley (super successful venture capitalist) hit the internet, and I’ve been stewing on it ever since. To be completely honest, I’m torn. I can’t decide whether I agree with what he’s saying.
But while I stall and take time to think, let me catch you up.
Intro to Regulatory Capture
In the talk, Gurley discusses regulatory capture. And he uses a definition from Nobel laureate economist George Stigler to explain it. Stigler said that…
In regulatory capture, a special interest is prioritized over the general interests of the public, leading to a net loss for society.
Typically, the “special interest” is an incumbent company in a given industry. Because they can get access to powerful politicians, and they have money to spend investing in both the campaigns of those politicians and in lobbying activities, the incumbents are able to shape regulation. And they influence it in order to restrict market entry and protect their pricing power.
Real-World Example
During the talk, Gurley explains several examples of regulatory capture he’s seen up close and personal. And he mentions recent examples like CoinBase, Meta, and OpenAI, but here’s one of the stories I think is the easiest to grok:
Tropos Networks is a wireless networking company from the 2000’s that Gurley’s venture capital firm, Benchmark Capital, had invested in. Tropos wanted to blanket US cities with free (to citizens) mesh wifi networks. Mayors from cities in Pennsylvania, California, Minnesota, and Florida loved it.
But the telecom companies hated it.
Gurley doesn’t go to this level of detail in the talk, but apparently governments really wanted telecom providers to accelerate their roll-out of broadband, and they were negotiating an agreement with said telco’s (worth $3B to Verizon, for example), to get them to speed up. But then that agreement had another section added to it… The new section said that these small wifi networks can only get built by smaller independents if local governments offer them to the incumbents first.
What the hell?! I’m not even a Tropos investor and that gets my blood boiling.
Gurley argues that regulation like this – drafted by the lobbyists of incumbents – is a classic case of regulatory capture. Which stifles innovation. Which hurts society. And that loss to society compounds, because incumbents continue to have more money, more exposure to politicians, and a revolving door of access as leaders move from private to public sector and back.
And by the end, Gurley has me (and you, if you watch the video at the end of this post) pretty much convinced that regulation is bad and that the money, exposure, and revolving door are to blame.
While I agree that regulatory capture itself creates a loss for society, here’s where I disagree with Gurley:
I think the revolving door and regulation (as a general thing) are a net good. Sensible regulation helps make sure the incumbents don’t abuse their power or cause accidental public harm. And the revolving door helps make sure that regulators stand a fighting chance of passing sensible regulation.
Regulation can be Good
Hear me out.
I’ve written several times about how a proactive government can be a good thing. Here’s a blurb from The State of the Forest to help me make my point (yet again!):
Good things happen when the US government takes a proactive, vested interest in innovative new tech. The Department of Defense invented the internet in 1966. Unsatisfied with having changed the world once, they also invented GPS in 1973. For a three-peat, they seeded the self-driving industry with a driverless car race in the desert in 2003. And a few years later they created the first AI voice assistant, which Apple bought in 2007 and became “Siri”. Innovations like those are how the US got into the top tech (and economic) spot.
“OK (I hear you saying), but those are about investing in early industries. What about government intervention (regulation) that slows down a given industry?”
Fair point. I would argue that AI is a great example of where we need this type of government involvement. With the right regulation, we can avoid the paper clip factory hellscape that I described in Crossroads for AI:
Imagine you’re the CEO of a paperclip company and you magically have the first Super AI. Congrats! If you tell the Super AI to help you maximize paperclip production, it might take the following steps all on its own:
1. Tweak the production schedule to eek out more paperclips. Nice!
2. Send emails, sign contracts, and send payments for new factories. Expansion!
3. Replace most humans in the factory with robots to improve quality. Ok, fair.
4. Hook-up remaining humans to life support so they don’t need sleep or breaks. Hang on, what?
5. Cover the Earth in factories, crowding out agriculture and food production. Wait, stop!
6. Start mining in space for more metal to keep up production. Nooo!
Some regulation would be helpful to prevent runaway AI and other harms to society. And while not everything is so existential, you get my point.
The “Who”
So who do we need to help us do it sensibly?
People who aren’t purely motivated by money. I say that because – as a reminder – government regulators are woefully underfunded (and underpaid compared to their private sector counterparts). In 2022, Meta’s legal budget was $4.8B, and the entire FTC budget was $0.38B… With 1/10th of the funding of Meta, the FTC is supposed to help regulate not just Meta, but all the other tech companies too. Best of luck.
And in addition to not being motivated purely by money, these people need to be extremely knowledgeable about trends and technology in several different fields. Not just AI, but biotech, space-tech, hard manufacturing (cough, chips), and much more.
One of the only ways to get people knowledgeable and financially secure enough to take on this work is to get industry vets into government. People that worked and built their wealth in the industries being regulated. And I admit they will absolutely have conflicts of interest – but those can be mitigated using the same solution that Gurley proposes: more transparency about funding and relationships between public and private sector. Rather than cursing regulatory capture and blaming the revolving door, let’s make a better door.
Bonus Bullets
Quote of the Week:
If you can connect all the dots between what you see today and where you want to go, then it’s probably not ambitious enough or aspirational enough.
— Shantanu Narayen, Adobe CEO
Quick News Reactions:
OpenAI is launching a hardware device… Or so the rumor mill says. And they’re teaming up with legendary ex-Apple designer Jony Ive to do it. Software is easier than hardware, yall. I won’t be holding my breath on this one.
Blackbird startup to revive restaurant loyalty…This seems like a good idea honestly. Independent restaurants need more than just a DoorDash integration to become sticky. If they treat it more like community building than coupon clipping, this could work.
Canva launched AI tools… In what feels like an obvious response to recent competitor launches. Unfortunately, they will need to be significantly better than Adobe to continue fighting the good fight. Incumbents compete by going wide (wide range of features, interoperable, secure for enterprise) and newcomers compete by going deep (more passionate users, more powerful features).
Tech Jobs Update:
Here are a few things I’m paying attention to this week:
Big Tech Job Posts: LinkedIn has 7,520 (-23.4% WoW) US-based jobs for a group of 20 large firms (the ones I typically write about — Google, Apple, Netflix, etc.).
Graph: Layoffs since covid (Source: Layoffs.FYI)