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Building A Business In A Highly Regulated Industry

  • Written by  Devaraj Southworth, Thirstie

0aaaDevaraj Southworth ThirstieAttention to detail is crucial for any successful entrepreneurial endeavor, but when it comes to launching and scaling a startup in a highly regulated industry, it’s a completely different ballgame. Entrepreneurs operating in highly regulated industries have to be even more shrewd when it comes to risk taking, innovation, and decision making — one legal misstep could result in serious legal ramifications and reputation damage.

For example, although delivery, on the surface, seems similar across categories, e-Commerce rules are very different when it comes to regulated industries vs. unregulated ones — from many perspectives, including those of the customers, brands and other stakeholders. Selling and delivering a pair of shoes or sunglasses is very different than making sure a bottle of Proper Twelve Whiskey gets to your door in under an hour.

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Laws governing the sale and distribution of alcohol must be handled according to very specific rules, and are subject to strict regulations. Alcohol brands are not permitted to sell directly to end consumers, but must go through a distributor, and then a retailer who can then sell to the end consumer. This process is something almost no other industry has to manage.

Although e-Commerce sounds like a no-brainer — something that all traditional CPG companies can do — it’s impossible for alcohol brands because of the legal and regulatory frameworks that have been in place for decades — quite literally constitutional amendments. If you’re working within a regulated industry, be prepared to ensure all areas of your business are compliant with current legislation. Using a white-label e-Commerce solution, such as the one developed by Thirstie, can not only help with regulatory compliance but also provide valuable data for both brands, distributors and retailers.

Although building a business in a highly regulated industry can be daunting — and with high barriers to entry — the opportunity/rewards are massive. Ultimately, if you have a smart solution to a real business problem and take a collaborative and creative approach to working within the legal framework, you will be successful. It may take longer than anticipated, but having conversations with all constituents and aligning on objectives will prove invaluable. In the next few paragraphs I will provide a few key learnings I hope will be helpful for those looking to build a business in a regulated industry.

Build a strong pro-business legal team. There will always be lawyers who will say you can’t do something or that there are no ways around a compliance issue. You need lawyers that can creatively help you develop a compliant structure — one that serves the business, while also keeping state and federal regulators comfortable.

Make certain you have a team that has national and local expertise. This is critical because in our industry, laws vary from state to state, and often city to city. Start with the most legally challenging and complex states, such as New York and Texas, and master them. Once you have figured out a compliant path forward in more challenging states, it’ll be easier to scale to other geographies.

As long as you seek out and retain highly skilled, qualified and experienced counsel, you will be fine. How do you find these counselors? I would suggest speaking to your advisors and investors, and leveraging your network. I would strongly caution against hiring an attorney who may be competent, but does not have expertise in your specific domain. You want to make certain your legal counsel has relevant experience in your specific discipline, instead of taking the risk that other types of experience will transfer. The risks are high in all industries, but even more so in regulated ones.

Understand what end consumers want and think about how you can ensure brands, distributors, and retailers are working together, while keeping the end consumer front and center. The most important thing is to have strong consumer support — if so, then you may have the chance to positively impact legislation.

While changing legislation might not always be warranted in highly regulated industries, it often comes up (along with the question of compliance, which I’ll address soon). The best indicator for success when it comes to changing legislation is how much end consumers want or need your product. Think of companies like Airbnb or Uber, both of which were able to impact laws because of their impact on consumer consciousness and consumer behavior. This consumer impact in many instances can help regulators realize they need toadapt to the changing landscape.

Should you hire in-house or look to outside counsel? Begin with outside counsel to save on costs. However, once your business gets big enough, look to hire strong in-house counsel. Thirstie has been around for five years and we're only now looking to hire, after spending time building the business and understanding the nuances of the landscape with an outside team by our side.

Scale your product responsibly. The larger you get, the more legal scrutiny you’ll be under. There are benefits to being small, as you can test different strategies, approaches and assumptions without being hampered by unnecessary review processes at the beginning. However, do not take shortcuts — to the contrary, respect and take compliance seriously from day one. If you are to be successful in a regulated industry, this philosophy should be part of your company’s DNA.

How do you create a safe, compliant solution for customers? You can look at what others are doing and either replicate it, or find a better way to do it. Various industries go through similar digital transformations and there are parallels that can be drawn, especially when it comes to convenience and connecting consumers with brands they love. This can also extend to personalization, product varieties and more.  

Begin by understanding what your partners are looking for and what end consumers want. Then look to understand why the product or solution doesn’t exist, and see if there is a way to build the solution.

Be nimble. Be open to feedback from customers, investors, regulators and other stakeholders. Additionally, be flexible and accommodating — your business may change based on new regulations, the market or factors outside your control. Build a realistic timeline, but pivot as needed. Clearly define what risks your company is and isn’t willing to take (which will impact the products and services you build), while keeping stakeholders and end customers in mind.

There are many regulated industries that could benefit from what we’ve learned operating as a compliant solution in the alcohol industry. Cannabis, including cannabis-based medicines and cannabinoids, is a particularly relevant industry. Venture investment in cannabis topped $880 million last year alone (PitchBook) with large investors like Altitude Investment Management and Casa Verde Capital leading the charge, and it includes investors with portfolios that extend beyond cannabis or regulated industries, such as Tiger Global Management, which raised one of the largest funds of the decade last year, investing in startups like Postmates, Instacart and Allbirds.

Given the amount of interest and capital flowing into regulated industries, all with signs of deep consumer adoption, compliance is essential. There are certainly challenges, but with the right model and an eye toward obeying laws and collaborating with state and federal regulators, you’ll be able to take advantage of some of the biggest opportunities.


 

Devaraj Southworth is the CEO and Co-Founder of  Thirstie, a technology company and e-Commerce platform for the alcohol industry. Thirstie is a white label enterprise solution for brands to enable e-Commerce. Powering transactions through a robust API and expansive retailer network, the platform provides brands with transparency into data, consumer insights analytics and ROI. Southworth has been a leader in business, digital media, and mobile technology for 20 years, and is a serial entrepreneur with a number of successful ventures to his name. Prior to Thirstie, Southworth built a digital agency to over $10M in sales which sold to an Inc. 500 Company, was Vice President of Mobile Strategy and Innovation for Amex, and is a former Deloitte and Accenture Strategy consultant.

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