News: CJ Exclusives

Government Regulations Rude Wake-Up Call for Startup

The euphoria of good publicity in his local paper was quelled by a cease-and-desist order from local regulators and threats of heavy fines.

Justin Miller, founder and CEO of WedPics, works from his company’s space at HQ Raleigh, where the tech startup relocated following eviction from Miller’s home office in 2012. (CJ Photo by Kari Travis)
Justin Miller, founder and CEO of WedPics, works from his company’s space at HQ Raleigh, where the tech startup relocated following eviction from Miller’s home office in 2012. (CJ Photo by Kari Travis)

Justin Miller is a former IBM art director who wanted to be a tech entrepreneur. He achieved his goal, but the day after his startup got a prized story in his local paper, zoning officials from the City of Raleigh presented him with a cease-and-desist order and threats of heavy fines.

It was, he said, his first experience with local-government regulators.

He had hashed out his business plan with a friend and partner over tacos and beer at a local Mexican restaurant, had raised funds from family and friends who believed that his brainchild — a photo app designed as a personalized, digital wedding album for brides — would work, and by 2012, with minimal resources and a staff of 10 developers, had established his company, WedPics, in the basement of his North Raleigh home.

But then, the day after the Raleigh News and Observer featured a major tech story about WedPics in October of 2012, he received a visit from city zoning enforcers.

“Around noon somebody knocked on my front door and handed me an eviction letter, which I [still have],” Miller said. “So they gave us this notice. We had 30 days to vacate the business from my house, after which they were going to start fining us $500 a day until we moved it. And we didn’t have that kind of money, so clearly that wasn’t a feasible solution for us.”

Miller’s experience, which sparked an uproar from the Raleigh startup community and led the CEO and his crew to accept a lease offer from an entrepreneurial office hub in the city’s downtown, is just one example of how regulations have spun out of control — to the point of hurting small businesses and startups across the U.S., said Patrick McLaughlin, a Mercatus Center researcher and co-author of a recent report on the cumulative cost of regulations in the U.S. economy.

Miller’s story is a localized example of a much larger issue, McLaughlin said. Between 1980 and 2012, regulatory growth has become a whopping $4 trillion cost to businesses and to the U.S. economy. And still more problematic is that — at least on a national level — it is tough to pinpoint the reason for such a spike, he added.

“On the surface, the answer is that Congress has created agency, after agency, after agency,” McLaughlin said. “All of these agencies are in existence because Congress created them. Sometimes Congress will pass additional acts that will require agencies to make even more regulations than they were originally instructed to do. But basically that’s the surface level answer — that Congress did it.”

“[But] what was Congress reacting to? Well, I don’t know that anyone can satisfactorily answer that question,” he continued. “In general, Congress reacts to crises, real or perceived, and creates agencies. That’s the reaction. And then, whether the agency solves the problem that led to the crisis, is a totally different question. It’s up for debate, and it’s [a question for which] the government has not come even close to digging up an answer.”

McLaughlin’s research, which was done with fellow Mercatus scholars Bentley Coffey and Pietro Peretto, is currently the only real research effort delving into questions about out-of-date and confusing regulations, McLaughlin said. And while his data hasn’t yet touched over-regulation on a state and local level, he says he hopes to also look at those problems in the future.

“Eventually, we will be able to combine all these [local and federal impacts], and look at the effect of all regulations that [entrepreneurs] in North Carolina are facing with business,” McLaughlin said. “What we do know is that there are certainly some researchers that have taken a look at the different types of regulations that take place at the state or local levels. The most famous of these is those who’ve looked at occupational licensing — and North Carolina has certainly been in the spotlight for that.”

Occupational licenses — governmental requirements that individuals must meet in order to engage in a regulated business — is a major force in North Carolina’s economy, according to a December 2014 analysis from the North Carolina General Assembly’s Program Evaluation Division.

In another 2014 analysis, this one from the North Carolina State Auditor, 57 different industry boards were identified, all of which were deemed ineffective in overseeing their respective business areas. Additionally, in March of 2015, Gov. Pat McCrory’s North Carolina Government Efficiency and Reform program found that the state “imposes more stringent requirements than most other states,” often without showing a return in public safety benefits.

State lawmakers currently are reviewing draft legislation that would eliminate 15 occupational licensing boards in the state, ending licensing requirements for laser hair practitioners, interpreters and translators, and recreational therapists, to name a few.

One of the toughest parts of dealing with over-regulation is keeping track of the rules that have run their course, and that are now counter-productive to their original purpose, McLaughlin said.

“Regulations that were created in decades previous, in a different era, are hindering the development of new technologies, innovation, and growth that comes from investments in the sort of tech that entrepreneurs [like Miller] have been developing,” he said. “So the challenge that we’re facing is, how do we have a regulatory system that will continue self-destructing regulations to get them out of the way when their job is done, or when they’re ineffective, or at some point hindering growth or new technology?”

Miller, whose company now supports 32 employees and sees millions of users and photo uploads every week, says he feels lucky that the city’s zoning regulations didn’t kill his startup. He’s still concerned, however, with the local government’s inability to see current rules from the perspective of businesses such as his — businesses that start with very little funding and are therefore operated from a home office.

“My frustration with regulations as a whole … is that everyone is so quick to say, ‘no, because this is how it’s been,’ and no one wants to challenge why something is like that and come up with a new solution,” Miller said. “So I’m very much of the mindset: Let’s figure out a solution.”

“Why not enable people to have a company in their house? And by having a company in their house, it just means you have a bunch of developers sitting together writing code,” he continued. “Regulate customers coming in. Regulate things like that. … But if you have people that are just going in there and getting something done and … not disrupting the flow of the neighborhood, what is the problem with that?”

Ultimately, said McLaughlin, it’s simply a tough sell to convince bureaucrats and lawmakers, whose reasons for being often are the number of rules they make, to abandon any kind of board, agency, or regulation.

“When you rely on agencies to go back and look at their own rules, there’s all sorts of reasons to not expect very good performance,” McLaughlin concluded. “You get the conflict of interest stuff, like if you ask a student to grade their own test, you’re probably not going to get a very honest assessment.”

Kari Travis is an associate editor of Carolina Journal.