Innovation – usually led by technology – eats business models for breakfast. Amazon lays waste to brick-and-mortar retailing, Uber wrecks the taxi industry and online media sucks the life out of newspapers. Innovations like these create value for consumers as they inflict pain on any employees, investors and communities that are caught on the wrong side of change.
The corporate names that lead the disruption capture our attention. But in the background, other players create new bits and pieces that accelerate the disruption and relieve some of the pain. This infrastructure takes many forms: products, services, information, legal structures, financing and more. This essential infrastructure helps make the new idea viable and, frankly, worth the pain. Without this infrastructure, the innovation might die or be held back by public discontent.
Uber and other app-based transportation platforms need additional infrastructure to operate smoothly. For example, every driver needs to maintain detailed mileage logs so they can deduct their automotive expenses on their tax returns. It’s a hassle: The logs must be kept accurately and maintained daily. Time spent logging is time that doesn’t bring in revenue.
Now, Intuit, the company that makes the popular QuickBooks personal accounting software, has stepped into the gap, with a service offering that uses the GPS in drivers’ phones to track mileage automatically. Drivers love it: “Through the app, each of my trips are [sic] automatically tracked; all I have to do is swipe whether or not it’s a personal or work trip, and then I’m easily able to see what deductions I’ve earned,” says Jose Gálvez, an Uber and Lyft driver based in Los Angeles. “I’m expecting more than $1,000 refunded based on mileage tracked.”
Mileage tracking isn’t the only piece of infrastructure that is needed to make drivers’ lives easier and more profitable. More suitable insurance plans need to be developed, for example. And a key piece of the puzzle is the evolution of our legal standards for employment: Do we need to invent a new legal status which is neither employee nor contractor but has some characteristics of both? (The case for a new legal status is strongly challenged in a recent analysis by Economic Policy Institute.)
The need for infrastructure also exists for innovations which have little to do with technology. Crowdfunding is a fast-growing new way for small businesses to raise capital (see chart). This innovation has game-changing potential to cut some of today’s banks and investment businesses out of the loop, enable a new type of financial service to emerge and slash fundraising costs to both entrepreneurs and investors.
But, although crowdfunding uses web technology to showcase deals and attract investors, the breakthrough involved a policy change rather than a technology change: The federal and state entities that regulate fundraising (mostly to prevent fraud) had to change the rules to allow money to be raised in a new way. The key innovation was worked out in a piece of legislation called the Jumpstart Our Businesses or Jobs Act. (Disclosure: my organization, American Sustainable Business Council played a role in developing the legislation.)
But even with the right legislation in place, crowdfunding still faces challenges. Potential investors have to learn how to evaluate potential investments properly. It’s very difficult for an inexperienced investor to evaluate a new business pitch correctly, and it’s almost as difficult for a startup team to come up to speed on all the rules and regulations that affect them as they start to raise money through crowdfunding.
To entrepreneur Sarah Hanks, the challenge created by the Jobs Act was an opportunity: “There are huge risks out there” she says, referring to the perils of investing in raw startups. She started CrowdCheck, a company that provides three different levels of due diligence to potential investors. Hanks has extensive experience evaluating financial risk. Previously, she served as general counsel of the bipartisan Congressional Oversight Panel, which oversaw the Troubled Asset Relief Program or TARP, chaired by now-Sen. Elizabeth Warren, a Massachusetts Democrat. CrowdCheck has done hundreds of evaluations and can deliver them at much lower prices than what law firms usually charge. And CrowdCheck helps startups like iConsumer navigate the compliance and disclosure rules – at prices much lower than a law firm would charge.
Arguments will rage on over ride-hailing apps and crowdfunding. Ultimately, whether they deliver enough value relative to the disruption they cause will depend on the quality of infrastructure – the products, services, information, regulations, etc. – that grows up around them. Crowdfunding, if executed well, opens up important new sources of capital to entrepreneurs and small business. Done poorly, it defrauds unsophisticated investors who can’t afford the loss. Ride-hailing apps, if executed well, solve problems of waiting time associated with taxis and may reduce the need for car ownership in congested urban areas. But if done poorly, these apps create a caste of low-income drivers who are no less exploited under Uber than when their predecessors leased taxis from medallion owners. It all depends on the execution.
David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report March 29, 2016.