Archive for regulations
Eaten Alive By Regulation: Innovation Fatigue and Fish Therapy
Posted by: | Comments“This is something that is dangerous and clearly unsanitary,” warned New York senator Jeffrey Klein in October 2009. “Once we shed light on this dirty little process, more people will avoid it and we can ban it.” The terrifying menace that so worried the good state senator and led him to introduce legislation to ban it is a natural therapy that has been used successfully for 400 years to treat the skin of feet. 400 years of successful, healthy treatments in the form of fish pedicures. In the US, though, the process is very foreign and has a certain squirm factor to it. Small fish that nibble at dead skin are a relatively common treatment offered in several parts of Asia, but in the West, worried officials have been applying or creating various regulations to fight against the invasion of new options for beauty care, one of many highly regulated business areas where innovation fatigue often comes from the burdensome and sometimes unpredictable applications of regulation.
In the US, approximately 15 states have banned fish pedicures. Some regulators say that they require tools used for pedicures to be completely sterilized after each treatment, which would mean, of course, frying the little critters after they’ve nibbled on your feet. An expensive proposition for business owners. Several people wishing to bring this new service to their community invested heavily in the systems needed for safe, clean tanks and fish, only to have new regulations added that would single out their business and ban it.
Can’t people make their own decisions about where they stick their feet, or how they deal with their bunions? If someone wants to use a natural method that has 400 years of successful history, do we really have to tell them that they aren’t allowed to for their own good? Sure, there are risks, perhaps similar to the risk of putting one’s feet into the water at a beach or swimming pool. But regulators protecting the public from themselves with unnecessary layers of regulation and bureaucracy represent one of the most difficult and painful forms of innovation fatigue. Someday we need to allow business and innovation to flourish and just get out of the way.
Yes, I recently tried fish therapy and found it to be remarkably refreshing and effective. The fish–I think these were Chinese chin chin fish, though Middle Eastern doctor fish are most commonly used–just nibble at dead skin and leave the healthy live skin alone, so they don’t cause bleeding or irritation. It’s hard to see how this could be any more dangerous or terrifying that placing one’s foot in a lake, a stream, or swimming pool, with the exception that there are 100% organic fish like to tickle your feet. I hope to try this again.
The Future of Biofuels: Environmental Innovation Fatigue for Environmental Advances?
Posted by: | CommentsThe federal government has set bold and challenging goals for future increases in the production of energy from non-fossil fuel sources. Seeking to curb our dependence on foreign oil as well as fossil fuels in general, our nation is encouraging the development of fuels from biological sources. Biofuels, diesel and gasoline made from renewable sources such as agricultural waste, forest sources, and algae, are a top priority and are the subject of extensive government-funded research and tax credits. Biofuels are a rich source of innovation and show an explosion in patent activity in the past 3 years.
Unfortunately, biofuels are also facing daunting challenges from uncertainty in federal regulations and tax policy that threatens to bring many innovations to a halt as industry puts many developments on hold due. The uncertainty in the environment–the regulatory and tax environment created by the government–is actually hindering many biofuel projects aimed aimed at enhancing the environment in the long run. This was the sentiment from several speakers in the midst of biofuels innovation in sessions at BioPro Expo 2011, a major conference on biofuels and forest bioproducts, being held in Atlanta, Georgia, March 14-16. Concern about government barriers to commercialization of biofuels advances was a repeated theme.
One example is federal regarding the definition of “renewable” for those seeking federal incentives for the use of renewable sources of fuels. Municipal solid waste (MSW) has a large component of plant-based materials such as paper and food waste, and is one of the most available and commercially attractive biofuel sources. The technology is proven, the raw material is available and economically feasible, and projects are ready to roll–except they have largely been put on hold until the federal government rules on whether MSW can be counted as “renewable” or not. Then there are strict new rules on boiler operation (the Industrial Boiler Maximum Achievable Technology, or BI MACT, rule) throwing another wrench and major cost burden on the backs of those with boilers generating energy from biomass sources. There are a host of other rules and conflicting definitions and policies adding to uncertainty, risk, and cost in commercializing biofuels. For the innovator, it is a challenging era with the potential of innovation fatigue from external or environmental factors.
Let’s hope that the rich opportunities being uncovered in biofuels can be commercialized rapidly and that the barriers to innovation can be reduced.
In the United States and many other nations, a question is being asked by many who struggle with the brutal reality of innovation fatigue. In many sectors, it is taking bigger investments, longer times, and much more pain to deliver innovation, and much of what passes for innovation in some sectors ends up being incremental fluff or mere cost-cutting. Some blame it on employee productivity, 
some blame it on short-term thinking in pubic companies driven by the unnecessary compulsion to please stockholders above all others, some blame it on the MBA culture instilled by leading business schools, and others blame it on governments that make every entrepreneurial move a slow trudge across the regulatory mire and a possibly fatal descent into quicksand. Some point to numerous factors including the capital crunch, creating a perfect storm in which even cash-rich companies are afraid to invest in real innovation because of uncertainty and fear.
Innovation fatigue, of course, is not uniform. Individuals and individual companies often buck trends and rise above currents of fatigue, and sometimes entire sectors seem energized and vibrant with innovation. For example, innovation in mobile applications and devices seems vigorous, but even then we have former innovation leaders like Nokia and Motorola feeling the burn of fatigue across many parts of their business.
Where are the real pressure points? What are the next steps that America or other nations need to take to restore a vigorous innovation culture across many sectors and help their nations overcome innovation fatigue? What do corporate leaders need to be doing differently to turn their companies in havens of innovation that can deliver growth and success for the long term? What do our political leaders need to do and understand to let the fire of innovation burn more brightly?
Let me know your thoughts. The five answers I like best will be rewarded with a free copy of Conquering Innovation Fatigue mailed to wherever you are. All submissions will implicitly have your permission to share them, though I will withhold your name if you ask me to. Send your comments to jeff at magicinnovation d0t com.
The Real Beef Behind the Lawsuit: Taco Bell and the Burden of Class Action Lawsuits
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When I eat at Taco Bell, I usually get chicken, steak, or even just a filling bean burrito, but I have tried the seasoned beef and can confirm that it is beef. I love to cook and naturally prefer my own cooking (and tend toward vegetarian fare these days), but being familiar with ground beef, I suggest that you can look at it, feel it, and taste it to recognize that it’s mostly ground beef. The popular chain, though, faces an expensive class action lawsuit because one woman (actually a team of lawyers in the name of one woman) claims that Taco Bell’s “seasoned beef” does not meet US legal standards. This story is making international headlines and generating a lot of buzz–see, for example, the story at CNN and the Washington Post. In some of the news stories I see, I wonder if anyone has actually read the legal complaint to see where the beef really is in this complaint, available in PDF form at http://www.beasleyallen.com/webfiles/Taco-Bell-Complaint.pdf.
News stories typically state that the suit is about Taco Bell’s seasoned beef having just 35% beef, less than the 40% standard for beef filling. (Some stories even put the 35% claim in their headline.) If so, Taco Bell will have no problem because anyone familiar with ground beef can recognize that Taco Bell’s beef filling is obviously mostly beef, and Taco Bell claims that it is manufactured with 88% beef. (What’s the other 12%? A little water, some oat products, spices, etc., as you can read in the lawsuit or hear explained by Taco Bell’s CEO on YouTube.) But the complaint as filed is not about 35% vs. 40% for beef filling, but over the alleged misuse of the term “seasoned beef” instead of more proper terms such as “beef filling” or “taco filling.” A beef “filling” has to be at least 40% beef, but to call something “seasoned beef” or “seasoned ground beef,” so argues the plaintiff, one has to meet the USDA standard for “ground beef” which means that it cannot have added water, binders, or extenders. So the basis for the suit is not whether lab tests show 35% or 40% beef (it’s obviously well over 50%, in my opinion, unless some rogue Taco Bell shop is watering everything down), but whether Taco Bell is incorrectly marketing their product as “seasoned beef” when it should be “beef filling,” “taco meat filling,” or some other less beefy term.
Some news stories even talk about lab results showing that the filling is only 35% beef. Perhaps this is an additional line being pursued by the law firm, but it’s not in the original complaint.
“Beef filling” vs. “seasoned beef”: that is the basis for claiming that Taco Bell is “immoral, unethical, oppressive, and unscrupulous” and “injurious to consumers.” Even if Taco Bell needs to tweak their marketing lingo, the allegations in the lawsuit seem a bit much.
A larger issue here is the inequity of class action lawsuits which enable the fiction of allowing a team of lawyers to claim to represent millions of people in suing companies for minute offenses. Yes, companies need to comply with the law, but when every successful company suddenly must face numerous shakedowns, each of which can cost millions to defend, it adds to the unnecessary burdens of being in business and creating jobs and real products. If Taco Bell needs to improve their terminology, call the USDA and let them issue penalties and corrective orders. Problem solved. But this is going to be a shakedown for millions. It’s hard for me to see how this is worth millions of dollars of penalties to see that justice is done–defining justice, of course, as paying large amounts of money to lawyers.
The complaint, by the way, is signed by attorney Timothy G. Blood. Interesting surname for a class action lawyer.
Update, Jan. 29, 2011: CNBC has an article about Taco Bell’s forceful response. Turns out that the USDA regulation cited in the lawsuit doesn’t even apply to restaurants. “The USDA’s rules apply to meat processors — the companies Taco Bell buys its meat from. Tyson Foods Inc., the company’s largest meat supplier, said it mixes and cooks the meat at three USDA-inspected plants and that the meat is tested daily to make sure it meets requirements.” That makes the lawsuit all the more ridicuous–and one more example of the many costly fatigue factors that businesses face these days.
Children Present: Innovators Beware
Posted by: | CommentsOne of the most challenging areas for innovators, entrepreneurs, and businesses of any kind now is field of children’s products. Innovation fatigue has reached new heights in this area due to “external innovation fatigue”–the kind that comes when outside forces from government and others, often with the best of innovations, deliver hard-to-evade punches to the body of entrepreneurs, including some very low blows.
The problem is especially severe when the governmental forces that can shut down a business or change the playing field unexpectedly arise not from legislators accountable to the voters, but from lone appointed individuals who may not be directly accountable to anybody.
The Consumer Product Safety Improvement Act (CPSIA) in 2008 dealt with, among other things, the problem of lead that had affected some books imported from China. Rather than address the specific issue of Chinese imports, the law sought a broad “fix” by banning lead in children’s products in general. Who could oppose that? But what it means in practice is that millions of toys and children’s books were unnecessarily discarded–wasted–by small businesses around the country because they could not afford to have lead testing done for the products in their inventory. For used products, there weren’t technically required to do testing, but they still had to comply with the law forbidding them from selling products with lead above a certain threshold. In practice, it was test or toss. I know of local entrepreneurs in Wisconsin who had to discard a lot of products.
For inventors and entrepreneurs, the added cost of certifying that your product is lead free can be one more tax that stands between success and failure, even when you have diligently avoided working with companies where lead could possibly be a problem.
At least the lead ban had its roots in law from Congress. The most recent ban affecting children’s products comes from one unelected leaders of an agency who has made tough new regulations on children’s cribs a top priority. In the past decade, 32 children died from defective children’s cribs with drop-down sides. Now drop-down sides will be banned in 2011, making it illegal to make, sell, or distribute them. (See “Baby Asleep in a Drop-Side Crib? Soon They’ll Be Banned” at Time.com.) Any death is regrettable, but 32 deaths from tens of millions of users is remarkably small. Chances are the deaths are not evenly distributed among companies, yet a blanket ban on a product punishes all, including those who had a flawless safety record and had delivered innovations that made their beds more reliable and safer than the competition. Now they are out of luck, as are the millions of parents (myself included) who have found safe and sturdy drop-down beds to be a big help in safely taking care of children and grand-children.
30 deaths across a decade: all tragic, but consider those numbers in light of the risk we face every time we take a step, turn a corner, plug in a product, or take a bite of food. Far more children die each year from salmonella–do we ban chicken and meats? There are about 30,000 deaths a year in the US for accidental poisoning and about 40,000 automobile deaths a year, with thousands of children in both categories. 3.5 million children aged 14 years and under suffer medically treated sports injuries each year, with many more deaths than cribs could ever cause. Do we ban sports? About 50,000 people a year go to the hospital because of skateboards, with many more deaths than cribs. Among useful but dangerous products, consider lawnmowers, where over 150 people die each year (that’s 5 decades worth of deaths from cribs at our current rate). Time for a ban?
There are hidden costs and even injuries for safety measures that are too strict. Alternative products and alternative behaviors have their own set of consequences. Will parents now be tempted to let kids sleep on beds or without the enclosed protection of cribs because the new generation of cribs are too expensive or too inconvenient? Is there any guarantee that children nationwide will be safer because of the ban?
I love kids and want them safe, but am most comfortable when informed parents take responsibility for that. When one person in an unelected position can make broad new rules that wipe out products that millions of people have found to be safe and effective, this changing of the rules midstream is a terrible disincentive for innovation in children’s products and innovation in general. Why bother with making the safest, most innovative drop-down crib when you’re going to be lumped with inferior products and stuck with a blanket ban that wipes our your business? It’s easy to do in the name of the children, but there are a lot of more pressing problems that children face, and better ways to deal with them than having one regulator issue laws without direct accountability to the people. Chalk one up for innovation fatigue.
Anytime is a tough time to be an innovator, but it’s especially tough when government gets overly involved in helping without considering the unintended consequences of the help, or the opportunity cost from helping in areas where help isn’t really needed. The quest to protect children is one area where the temptation to be overzealous can be especially strong. Who could be against protecting children?
More Examples of External Factors Contributing to Innovation Fatigue
Posted by: | CommentsFurther stories in the news illustrate the important issue of external innovation fatigue factors as raised in our book. Recent examples:
- The Feds vs. Fruit Juice: The FTC goes to war against those who promote the health benefits of the pomegranate.
- Small-Scale Regulation May Bring Big-Time Troubles for Wisconsin Nanotech
- Licensing to Kill from today’s Wall Street Journal: A “study to be released this week by the Institute for Justice … has collected dozens of examples of regulations choking economic growth by taxing and over-licensing small businesses. In a survey of eight major cities, the study found that entrepreneurs routinely face obstacles of bureaucracy and red tape that deter them from otherwise promising opportunities.”
- “CSPC Issues Final Rule on Definition of Children’s Products” (My take: let’s make products for children or that could even conceivably be used by children up to age 12 more expensive and riskier than ever, with a huge cloud of uncertainty about what products are covered just to keep innovators nervous and in the dark.)
Here’s an excerpt from the first story about pomegranates by L. Gordon Crovitz:
These days, pomegranates are far down the pecking order of fruits, though some think it was a pomegranate, not an apple, which Eve offered to Adam. Fewer than 4% of Americans had tried the fruit before 2002, when marketing mavens Lynda and Stewart Resnick launched the 100% fruit juice they call POM Wonderful. It’s since become a top seller, in its curvy hourglass-shaped bottle.
The Resnicks, who also owns the Teleflora and FIJI water businesses, invested in orchards in California in the 1980s. They’ve also commissioned research on the anti-oxidant properties of pomegranates—too much research, according to a Federal Trade Commission (FTC) complaint last month alleging deceptive advertising. “Any consumer who sees POM Wonderful products as a silver bullet against all diseases has been misled,” said David Vladeck, who runs the agency’s Bureau of Consumer Protection.
This is hyberbole—no POM ads claim the pomegranate can cure “all diseases.” But the complaint is a stalking horse for the agency’s more radical position: that health-food companies now need to get Food and Drug Administration approval for scientific claims, similar to the process pharmaceutical companies follow for drugs.
Ms. Resnick told me last week that the FTC complaint is “a 20th-century idea in a 21st-century world.” She says that “there is so much information available that consumers can make up their own minds. They are smarter than the FTC gives them credit for.”
I’m a huge fan of healthy food and a lifelong pomegranate eater (decades before POM helped people appreciate how delicious this fruit is). My introduction to pomegranates came from my mother who and her southern Utah roots (my mother was raised in hot “Dixie,” the St. George area in southern Utah, where pomegranates grew in her backyard. In fact, the photo below shows the flowers of a pomegranate tree in my grandmother’s backyard. It’s an amazing tree with beautiful, healthy, delicious fruit. But thanks to the Federal Government’s attitude about such things, one innovative company faces a surprising external “fatigue factor” from bureaucrats who might be happier if we all just drank Kool Aid.
Pomegranate Flowers, St. George, Utah
Used Patents: A Potentially Deadly Part of Your Portfolio
Posted by: | CommentsIn Conquering Innovation Fatigue, we explain how “Patent Pain” is one of the external innovation fatigue factors that can slow down innovation. This factor includes actions by courts and lawmakers that add to the difficulty and expense of protecting intellectual property rights. A new aspect of this problem is the recent explosion in risk to patent holders–particularly the holders of “used” patents (patents directed to products that the patent holder markets). This risk stems from a recent Federal Circuit decision, Forest Group, Inc. v Bon Tool Company (link is to the PDF file of the Dec. 28, 2009 decision). The controversial aspect of this decision is that it suddenly changes the way the law has been applied in a way that could severely punish patent holders for what might be an innocent mistake.
The law provides a penalty of up to $500 per offense for false patent marking–inappropriately marking a product with a patent number such as one that has expired. It can be an act of intentional fraud or, in many cases, a simple mistake. That $500 penalty per offense has long been interpreted as $500 per continuous false marking act, not as $500 for every falsely marked product. All that changed a few months ago, thanks to the Federal Circuit Court’s decision. Now if you sell a billion packages of diapers and one of the patents listed happens to have expired a few months ago (oops, clerical error!), you could be sued and face up to $500 billion in penalties. Even if reduced to a mere, say, $50 million, it’s extremely dangerous for a corporation. Naturally, this has drawn in swarms of lawyers and looks like it could create a whole new cottage industry based on sucking capital out of the veins of those who actually use the patents they obtain. Patent holders are rushing to check their patent markings more carefully and to redo packaging (an expensive process, unfortunately) to ensure that expired patents are taken off.
The social harm of listing an expired patent on a product seems virtually negligible. A competitor interested in copying the product will naturally look up the patent and determine if the claims might be a barrier, and in this process can readily see whether it has expired. Yes, it’s a form of false advertising, but not because a real patent wasn’t obtained, only because it eventually expired and the marking wasn’t updated yet. Not as serious as making up a bogus patent number and listing that for honor never earned. $500 for a continuous act of false marking may seem too light a punishment (the law was written back when $500 was worth something), but up to $500 per product strikes me as ridiculous and threatens to only further penalize and discourage producers and innovators.
Here’s hoping that Congress will correct the abusive application of the law by the Federal Circuit and make owning a used patent less dangerous.
Related story from the Wall Street Journal: “New Breed of Patent Claim Bedevils Product Makers” by Dionne Searcey. This story discusses a more recent ruling that overturned a decision saying an attorney suing Brooks Brothers for expired patents had no legal standing to sue. Now lawyers everywhere can join in the feeding frenzy.
Update, Sept. 3: One of my favorite IP strategists asked what constructive steps we could be taking to help clients deal with this threat, apart from diligently checking every marking. Tough question. What if products were marked with codes—could be simple six-character strings that you plug into tinyrul.com or some other website–to bring up a page with the current patents applicable to a product? The page could be automated so it is tied in to patent databases so that only current patents are displayed, and/or status information was displayed for the patent. Thus, if a product does have a patent associated with it when packaging is designed, instead of listing the patent number(s), why not list something like: “For related patents, see PatentMarking.com/14Zq2″.
Could this indirect approach fully meet the demands of patent marking and provide sufficient notice? Perhaps not without a tweak of the law, but I’d be happy to see an electronic solution.
When I gave the example with PatentMarking.com, I hadn’t yet checked out that URL and was just throwing out what sounded like a good domain name for such a tool. Turns out that OceanTomo owns it and is using it for a related purpose. Cool! Glad to see that they are advocating online marking of patents.
So why not print each product or its packaging with a code that links the product to a website for automatically updated information, with disclaimers and means for flagging corrections to reduce corporate liability if something goes wrong with the automated process? Could this help reduce the future threat of patent marking sharks trying to shake down companies for millions of dollars for innocent and hard-to-eliminate marking errors?
Another update: Greg Aharonian‘s latest PATNEWS newsletter mentions the WSJ article, rejects the outrageous notion that false marking of patents is a serious evil, and contends that Congress should make these lawsuits illegal that seek to shake down companies for millions due to a marking mistake. May that happen swiftly! Thanks, Greg.
Ramping Up External Innovation Fatigue
Posted by: | CommentsWithout wishing to be political, I have to say that I am worried about the future of innovation in light of “external innovation fatigue factors” that arise when government creates imposing barriers for innovators, especially for small businesses and lone entrepreneurs. As we note in Conquering Innovation Fatigue, the problem is often one of unintended consequences from well-intended actions. In the past several years, there has been an acceleration in regulatory burdens, tax burdens, and litigation risks that make starting or running an innovative business riskier than ever. Mounds of cash have been taken from the private sector and given to government agencies and large institutions for so-called stimulus or bailouts, but the real cost of such “help” is rarely considered. We see failed organizations on life support and may be happy to hear of thousands of jobs in these firms that appear to be saved, but we don’t get to see and consider the small businesses that dry up due to the money that was channeled elsewhere or that face the burden of unfair competition from failing institutions shielded from the consequences of their less competitive business models.
We see many leaders calling for even higher taxes on those who are (or would have been) most likely to create jobs and launch businesses. We see government making it more difficult and costly to obtain the energy that is literally and figuratively the fuel of our economy. We see US corporations facing burgeoning regulations regarding environmental issues, hiring practices, benefits, etc., that are not found in the nations we import from, with the natural consequence of punishing those who wish to produce in the US and motivating them to close shop here and go elsewhere. We see increased government intervention at all levels of the private sector, often favoring the large and well connected while leaving the lone innovators and start-ups in the dust, strangled with red tape and choking with uncertainty about the future. Meanwhile, property rights, including intellectual property, are increasingly in jeopardy. This is the stuff of “external innovation fatigue.” It’s been bad for years, and it’s accelerating now at a dangerous pace.
Those who wish to launch new businesses and reap the rewards of their innovation can still succeed, but need additional help and caution in moving forward and finding the right partners, business models, and approaches to reduce the risks and create lasting competitive advantage that can survive the billowing waves of external fatigue factors. We offer guidance in the book on these issues, including the need to be more holistic in pursuit of intellectual property, taking the path that we call 360-degree intellectual assets. Thinking about patents exclusively can lead to excessive costs and disappointments. I suggest reading carefully our recommendations on holistic intellectual assets and giving us a call for further guidance. Innovationedge can be reached at 920-967-0466.
The lifeblood of innovation is capital. Investment of capital is the primary difference between great ideas and great teams that go nowhere and those that change the world. From the airplane to the iPod, from wonder drugs to wonder software, innovation requires invested capital to bring concepts to commercial reality. Angel investors play a crucial role in the ecosystem of invention, but they may soon be shut down by Congress in their efforts to “protect” Americans from financial risk.
Risk is a dirty word for those who don’t understand business. Wouldn’t it be nice if government could just protect us from the risk of failure and ensure that we are always safe? But this kind of thinking means stagnation, captivity, and the death of innovation, for the opportunity to succeed inevitably is shadowed by the risk of failure. If success is guaranteed, why put forth the effort to create and innovate? If a venture is protected from failure, we are also protected from the kind of success that inspires innovators and their backers to undergo risk.
Tom Still of the Wisconsin Technology Council has boldly and bravely weighed in on Congressional plans to protect us from risk, plans that would give them even more control over the things they seem to understand least while making it more difficult than ever for innovators to succeed. Tom Still challenges the financial reform legislation proposed by Senator Dodd and points out that his efforts to protect us will crush angel investing, which in turn will stop many innovators from having a shot at success. Ultimately, Dodd seeks to “protect” people from investing their own money the way they want to, and the unintended consequence will be a painful blow to innovation. Tom Still’s article is “Angels on the head of a sharp pin: Financial reform bill poses threat,” published April 21, 2010 at Inside Wisconsin by the Wisconsin Technology Council. Here is an excerpt:
The financial sector reform bill being pushed by U.S. Sen. Christopher Dodd, D-Conn., takes direct aim at the wings of angel investors for reasons that defy explanation. If passed, this “Washington-knows-best” attempt to regulate some of the nation’s most productive risk-takers could destroy the entrepreneurial economy.
Angel investors are often entrepreneurs who hit a home run in their own start-up businesses and who want to reinvest in other young companies. Angel investors are generally strong business executives with an eye for innovation, and they’re not afraid to take a calculated gamble on companies that are too new to get financing from venture capitalists or too risky for banks.
They usually invest close to home and most often as individuals or within a family, but increasingly angels invest as members of angel networks or angel funds that offer some safety in numbers and more partners to screen potential deals.
In Wisconsin, angel investors have been in the vanguard of fostering the state’s early stage economy. Five years ago, there were only a handful of angel networks in Wisconsin. Today, there are nearly two-dozen networks and funds – and they’re not shy about rolling the dice on Wisconsin companies in sectors such as biotechnology, information technology, medical device, advanced manufacturing and “cleantech.” …
But if Dodd has his way, these individualistic investors will be regulated out of existence.
The Restoring American Financial Stability Act, of which Dodd is the chief sponsor, would tighten regulation of the nation’s financial system in ways large and small. It contains three provisions that would effectively kill angel investing in the United States:
- It would require start-up companies to register with the federal Securities and Exchange Commission, and wait at least 120 days for SEC review, before trying to raise money. Currently, fledgling companies can raise money from accredited investors without regulatory approval. Four months is an eternity in the life of a start-up company, and most would die in the vine before they ever get a chance to grow.
- It would redefine who is an angel. Accredited investors, who are people deemed wealthy enough to invest in start-ups, would be limited to those individuals with more than $2.5 million in assets (up from $1 million today) or a personal income of $450,000 per year (up from $250,000). This will dramatically decrease the supply of angels, which the University of New Hampshire’s Center for Venture Research estimated at 259,000 in 2009. Those angels invested $17.6 billion in about 57,000 deals.
- It would subject investors and start-up companies to state-by-state rules versus a single set of SEC standards. Along with the new SEC filing requirement, that would add red tape, time and cost to the investment process.
In its frenzy to clamp down on Wall Street, Congress is threatening an investment community that fosters innovation, mentors young companies and generally cares about how the economy is faring where they live. Angels have helped to create some of today’s biggest companies – Apple, Amazon, Google and many more – usually without putting anyone’s money at risk other than their own.
Angel investing isn’t perfect; the average return on investment proves that. But it’s precisely the kind of bottom-up, largely self-regulated economic activity the nation needs as it struggles to create new companies and jobs. Only those federal lawmakers intent on a top-down, command-and-control economy would think otherwise.
We have enough innovation fatigue factors on our backs already. Clamping down on one of the major arteries that provides capital to start-ups and entrepreneurs is not going to enhance circulation in the atrophying limbs of this economy. We need to back down and let the private sector thrive on its own, taking on both risk and failure, and when we fail, let us fail instead of taking from those who succeed to prop up failures deemed “too big” to fail. The free market offers powerful solutions to some of the problems we face and powerful incentives for innovation, if we can stay out of the way.
Kudos to Tom Still for his insights into the risks Dodd’s bill poses.
Beware Unintended Innovation Killers from Laws, Regulations, and Corporate Policies
Posted by: | CommentsIn the game of chess, experienced players know that a move that looks tempting can often open up fatal weaknesses that deliver swift defeat later in the game. With experience, discipline, and solid strategic skills, good players can look several moves ahead and be aware of broad patterns and principles that can give one an improved position with options for success in endgames too far away to calculate in advance. Novices look for easy fixes to threats and quick attacks based on looking just a few moves ahead. Many times they are surprised at how their moves to solve a problem or gain an advantage make them easy prey. Their style of playing is fraught with moves that bring unintended consequences later in the game.
One of the great tragedies of human decision making is the pernicious inability to consider far-reaching implications of an action. To avoid harmful unintended consequences of a decision, there are two possible solutions: 1) get assistance from experts providing guidance from many difference perspectives and do the best to consider new areas and issues that were previously overlooked, and 2) follow proven principles and strategies that increase the odds of success in spite of the impossibility of calculating everything. Both of these principles can be and probably should be used.
Innovation, for all the voices hyping it, is one of the least considered factors when policy makers start shaking things up. Whether it’s a new law, a tax policy, a regulation, or corporate policies, decision makers easily overlook innovation–real innovation, not just money spent in the name of innovation–because they tend to overlook the individuals who are the source of innovation. Real innovation begins in the minds of individuals with a vision and must be nurtured to succeed. The voice of innovators, including the voice of entrepreneurs, inventors, university professors post-docs, corporate R&D staff, etc., is rarely heard. The voices of CEOs or other top leaders from big companies may be heard. The voices of direct reports to a CEO may be heard. The voices of celebrities and activists may be heard, but who actually seeks out and listens to the real innovators or prospective innovators in our economy? Who considers what impact a law or policy will have on those individuals and their incentives to innovate or their ability to succeed? They are among the voices that should be carefully considered when making policies to avoid unintended consequences that might crush innovation and economic growth.
There are several general principles that should also be considered by policy makers. Innovation at the personal level, which is one of the themes of Conquering Innovation Fatigue, requires personal liberty. It requires a system in which individuals and companies are motivated to take on the high risks of innovation because there are incentives to succeed. These incentives for many require a form of government in which intellectual property rights are respected as well as property rights in general. When property can be seized capriciously, or when the fruits of one’s innovative labors can be taken on a whim or taxed to death, why bother innovating?
Every law, every policy, every act of government should be constrained by general principles, such as those espoused in the US Constitution, and done with care to avoid harming the economy with unintended consequences that trample on the delicate flower of innovation.