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4 Tips for Assessing Political and Regulatory Risk for Your Startup

Nathaniel Wienecke is senior vice president for federal government relations for the Property Casualty Insurers Association of America, which represents over 1,000 property casualty insurers nationwide. He also is a member of the MIT EMBA class of 2012.

When entrepreneurs launch a new company, they tend to focus on ramping up their new product or service, applying for that first contract, and securing a stable client base. If they’re successful, the business grows and reaches a critical mass. It’s only at that point (and, frankly, sometimes not even then) that entrepreneurs begin to think about the political, regulatory and legal/legislative risks to their burgeoning company.

More than five years after the Wall Street and housing crash, and the federal regulatory and legislative intervention that followed, it should be clear to companies large and small that managing how Washington sees them and their industry can mean the difference between bankruptcy and success. Members of the C-suite need to be able to look around corners to see what’s coming or they may end up in the cross-hares of a government investigation or spending millions of dollars on legal fees. In addition to the monetary costs that severely affect a company’s bottom line, there also is the reputational risk to the company that comes along with being the focus of an ‘Inside-the-Beltway’ brouhaha.

Here are a few tips to help you manage your company’s risk based on what I learned at MIT, my work on Capitol Hill, and corporate experience:

Start at the Beginning

Entrepreneurs need to start thinking about risk at a much earlier stage, preferably at the same time they’re writing a business plan, developing products and defining the brand. No CEO wants to be reactionary. It’s imperative to thoughtfully consider what threats may come your way and develop a basic plan to address them well before your launch.

Uber, the app-based car service, is a good example of a company that thought about its regulatory, legal and political challenges at its inception. It’s been so successful, in part, because of that forethought. Of course, its phenomenal growth means it can afford to put into place comprehensive and well-staffed risk management strategies. Which brings me to my second and third points: How does a company afford to account for risk on a start-up budget?

Put Experts on your Board

An ‘expert’ is someone with experience in your state or the nation’s capital. This person doesn’t have to be a former member of the state legislature or Congress or a rainmaker. Don’t think star power; think expertise and dedication. There are plenty of people who have served in government that have the qualifications necessary to navigate you through the state or federal rulemaking and lawmaking processes and who can help you anticipate challenges that you may not yet see. This doesn’t have to be a lawyer either. While lawyers have their place, political risk ultimately determines regulatory risk.

Affordable Options

Why do entrepreneurs put off thinking about political, regulatory and legal/legislative risk? Generally, they believe they can’t financially afford to invest in risk management. Adding risk managers to a company early on can be mind-numbingly expensive. But you don’t need this expertise in-house at the beginning. You won’t get the insight you need through local networking events with other entrepreneurs, one meeting with your local legislator, or simply by reading the business and op-ed pages in The Wall Street Journal. However, trade publications – especially those offered by actual associations that represent your industry – will provide vital insight into the political, regulatory and legal challenges that companies like yours are likely to face. They will also provide the advice you need to navigate those challenges. Also, industry association-sponsored events will deepen that knowledge and give you access to experts who can help you. This option is very affordable and won’t let you down.

A Worthwhile Investment

Enterprise risk management requires some financial investment on the front end. But as LightSquared, which faces bankruptcy after the FCC took away a license for a new wireless network, or General Motors, which faces federal government inquiries into how it handled faulty ignition switches just a few months after the federal government sold its final stake in the company, have shown, companies can’t afford not to make these investments.

How does your company manage political and regulatory risk?

Originally Published: MIT Executive Insights Blog
Author: Nathaniel Wienecke