In a series of State Policy Updates, we are exploring how state initiatives are impacting the innovation happening in startup ecosystems across the country. While much of Engine’s work centers on policy advocacy and education in the federal landscape, state-based policymakers impact startup formation and growth through their own work. We’re tracking what’s working for startups, what’s falling short, and what federal policymakers can learn from their state-level counterparts.
Most of the national conversation at startup and innovation policy focus on federal policymakers: what Congress and agencies like the FTC can do make it easier for innovative startups to launch and grow. But state-level policymakers play an increasingly important role in creating the rules of the road for startups across the country, from states addressing labor policy where the federal government hasn’t acted, to increasing or limiting regulatory barriers, to using various incentives to attract startups to launch in their state instead of elsewhere. To give federal policymakers a deeper understanding of how state innovation policies affect the startup ecosystem, Engine partnered with the Charles Koch Institute to hold a series of events on the Nuts and Bolts of State Innovation Policy.
We first explored how talent policy — laws enabling or restricting the use of non-compete agreements or others limiting the use of independent contractors — impact how and when startups can hire talent, or even launch. In many ways, policymaking hasn’t kept up with today’s labor market, where employees switch companies or leave to start their own company. As Victor Hwang, founder of Right to Start, said, “We need to rethink the nature of talent and people and mobility. We don’t have a narrative or legal structure, and this non-compete reform movement is getting to the heart of that.” In states that allow permissive use of non-competes, worker mobility is often limited, with startups unable to hire talent as needed, and would-be founders limited in their ability to launch their companies. Kenan Fikri of the Economic Innovation Group explained that state action in the non-compete space should send a signal to federal policymakers. “Congressional action is so important,” said Fikri. “You can see strong signals from states that reform is necessary which builds momentum for Congress to set the bar.”
While states like California restrict the use of non-compete agreements, allowing for workers to better move about their industries, panelists indicated policymakers in the state are also hindering startup growth by limiting who can qualify as an independent contractor. Many startups, particularly in their early stages, rely on project-by-project work — including those distributed by developers — to build their products and services. The ability to hire independent contractors, therefore, gives startups the ability to grow while affording the cost of needed talent. Laura Good, co-founder of StartupSac, noted to attendees that regulations limiting a startup’s hiring needs “can make it impossible for early-stage startups to get off the ground,” and that “they won’t be able to stay razor focused on whether or not their startup is solving a problem.” And the Mercatus Center’s Liya Palagashvili agreed that independent contractors are critical to emerging startups, despite the prevalent misunderstanding that only large companies benefit from their employment.
The next panel focused on regulatory sandboxes, which allow companies to test products and services through a limited launch, without facing ominous regulatory and licensing burdens. These models, as explained by panelist James Czerniawski of Americans for Prosperity, “give entrepreneurs who may have innovative solutions to problems the opportunity to help people in a way they otherwise wouldn’t be able to,” allowing startups to develop their concepts temporarily exempt from certain regulatory and licensure requirements. Nicholas Hinrichsen, co-founder of WithClutch — a software company enabling car owners to easily refinance their auto loans that took part in Arizona’s sandbox — said regulatory sandboxes give startups the room they need to innovate, and that without Arizona’s sandbox, “the only way would have been to ask for forgiveness instead of permission, and that’s not something we wanted to do.” And Joshua Bryant — a partner at FreedomTrust, a digital asset management platform for financial advisors who is participating in West Virginia’s sandbox — agreed, emphasizing that, “regulatory sandboxes provide the overall framework that lets us work and try out our product and [test] without worrying…about costs. Having this space is great and helps us focus on narrowing down our [purpose].”
And it’s not just the startups themselves that benefit from the novel frameworks, they are also beneficial for investors and even regulators. As Jo Ann Barefoot, CEO and Founder of the Alliance for Innovative Regulation explained, “if nothing else, it signals to investors that this is a company that wants to play nicely with regulators,” and that sandboxes “provide a space for experimentation and innovation for both consumers and regulators.” Federal policymakers should take note of these successful state policies, since many regulatory burdens exist at the federal level, and the federal government could follow the lead of states with regulatory sandboxes and give startups the tools they need to more easily test their innovations.
The final event in the Nuts and Bolts series will feature a panel of experts exploring how tax policy and financial incentives can both slow and spur startup growth. From digital ad taxes to programs incentivizing angel investment, state fiscal policy can have a significant impact on startup growth and investor decisions. And while federal policymakers similarly work to encourage growth in the startup ecosystem, these policies intertwine with those pursued at the state level. We hope that you’ll join us for the last event in this Nuts and Bolts series, Friday, September 24 at noon ET, to explore what states are doing to incentivize startup growth across the country. Register today.
