The “Sharing Economy” Comes Of Age

This week Airbnb settled its lawsuit against the city of San Francisco. By next year, only properties that have registered with the city will be eligible to list on the site.

Airbnb’s decision to settle marks a new chapter in the quickly-evolving sharing economy.

Initially, Airbnb, Uber and others opted to rush into new markets, largely ignoring existing laws. This “ask for forgiveness, not permission” approach clearly paid off, as both companies were able to get traction quickly, and now have significant market share and huge valuations.

But that approach was not sustainable. As the companies went from upstarts to powerhouses, it was inevitable that regulatory issues would become more significant. Airbnb is now leading the way in adopting a strategy of constructive engagement with regulators and lawmakers across the globe.

Prioritizing the importance of policy is a relatively new phenomenon for many software-centric entrepreneurs, but, as I posit in The Third Wave: An Entrepreneur’s Vision of the Future, it will be much more common in the future. Of course, the core innovation matters most — creating a unique, compelling, disruptive product or service is job one. And moving aggressively to enter the market and gain share will also remain important. But the playbook that worked so well in the Internet’s Second Wave — focusing on launching products and building large audiences, and ignoring anything (including regulations) that might slow you down — is not going to work in the Third Wave.

It’s one thing to take on antiquated taxi or lodging rules, many of which were put in place to protect the incumbents. It’s quite another thing to launch food, drugs, medical devices, driverless cars, or drones. We can all complain about regulations, but the reality is most people believe there should be rules to ensure that the food we eat doesn’t make us sick and the driverless cars on our roads don’t wreak havoc. And ignoring regulations and winging it won’t get you on the unicorn list if you’re in the drug business — it might instead land you in jail, as drug safety and efficacy will remain critical ingredients of any health care future.

Technology risk dominated the First Wave; investors wanted to be sure startups could actually build what they were pitching. In the Second Wave, market risk became dominant; investors had no doubt you could build a photo app, but they wondered why it would break through and win in a sea of hundreds of lookalike offerings. In the Third Wave, policy risk will become paramount. Building the software may end up being the easy part; the hard part could be navigating the trick regulatory waters.

In order to succeed, Third Wave companies will need to engage regulatory experts who understand the requirements they are facing. Companies won’t get venture funding without a credible market strategy that includes a solid plan for managing regulatory thickets.

This isn’t to say we should let government off the hook when it’s standing in the way of innovation. It is the government’s role to establish the conditions that allow entrepreneurs to do their work. When the rules are less about safeguarding consumers and more about protecting deep-pocketed incumbents, we need to advocate for change. Similarly, we need to push regulators not just to keep bad things from happening, but to enable good things to happen. The U.S. government got that balance right as the Internet emerged; hopefully they will again in the next wave.

We should celebrate the successes of sharing economy pioneers. These companies have transformed important sectors of the economy, and brought competition to old-line industries that no one considered a technology play. But celebrating success is not the same thing as copying it. Going forward, the most successful companies will be the ones who realize it’s time to engage with policymakers. They simply won’t have the option of going it alone.