Where are the hordes of founders?

Y’all I CANNOT believe it’s February already. Like everyone else I started 2023 with what can only be called an “ambitious” list of not really resolutions, but more like “improvements” that i want to make to my life this year…And now it’s February and I am STRUGGLING to keep up. As some of you may know I am a walking example of the state of health in America. I am a diabetic with high blood pressure undergoing IVF. Most of these “improvements” I wanted to make surrounded my health, and yet as I write this I am eating Raising Cane’s fried chicken (and listening to this week’s playlist which is a doozy of a walk down memory lane for me.) I’m disappointed in myself for trying to start the year off so well only to be back to my bad habits so quickly. I’m trying to not be so hard on myself, but it’s high time that I start to meet my expectations for myself.

Also, I’ve finally got my schedule under control and now I will be offering 1:1 Sessions for Highly Regulated subscribers! These are first-come, first-serve opportunities for folks to speak with me about their regulatory challenges or issues in the space they need directional help with. Sign up here for Highly Regulated office hours now!

I’m in the process of creating a few educational and networking events for all the founders, investors, professionals, and regulators in our growing community so look forward to some announcements in the coming weeks about those as well! (If you're interested in sponsoring, please email me!)

One BIG announcement I’m super hyped for is that Highly Regulated is partnering with Unit21 this month! We’ve had more than a few requests to partner with companies but nothing has really piqued my interest like this. I absolutely LOVE this company!!! I’ve seen the devastation that hits when fraudulent activity isn’t taken seriously by companies so a team working to democratize crime fighting through rock-solid no-code tools is beyond up my alley! We’ll be having a few features and events with Unit21 throughout the month so stay tuned for more information.

What I’m Ranting About This Week…The Myth of the Tech Layoff to Founder Pipeline

The interesting thing about the tech bubble bursting as we speak (that’s what all those layoffs and tumbling valuations means, sorry to bring bad news y’all) is that now a lot of people without a deep sense of history are giving their “insights” into what this means for the tech industry. What will happen now that massive amounts of tech employees are being sent packing by their startups and even more established tech companies? Popular sentiment is that we will see a ton of these laid-off folks join the ranks of founders. I disagree. And here’s why…

First off, after the first tech bubble burst in the early 2000s, we didn’t see a glut of new founders. Folks in entrepreneurship already stayed put throughout and they started all kinds of cool things (probably because they couldn’t easily find employment or because they wanted to remain their own boss.) Instead, the non-founder folks moved into technology-oriented positions at more stable, traditional employment. Historically, tech employees find new positions quickly after layoffs - especially with firms that might not have previously been competitive for their level of compensation. These new employers know this and can be a great landing spot for tech talent. We’re seeing this happen now will laid-off employees getting snapped up relatively quickly.

However, what this also means is that these previously laid-off folks now have regained stable employment in a more traditional setting. Most likely, they are probably going to not want to rush back into that startup “grind” mindset after tasting the freedom of a what a more calm 9-5 job might bring. There is a strong chance these employees stay in their new jobs for longer than what the usual tenure is for a tech employee. They probably save some money that they might have lost during their period of unemployment. Remember - these aren’t founders or employees who left with golden parachutes. These folks left with stock options and parts of their compensation that could have been worth pennies or even nothing. Therefore, they most likely are not rushing to have significant parts of their compensation be stock-based anytime soon. Money is security, stability, and freedom and all of those things are in short supply during a recession.

Finally, time isn’t really on the side of the “laid off employee to founder” argument. During the time tech talent spends regrouping in the non-startup space, they will get older too. They will get married. They will start families. They will get those “life” things everyone speaks about so highly. Whether we want to acknowledge it or not, the startup space isn’t great for folks with families. Families cost money and children require time. Both money and time can be in short supply when you become a founder.

I will leave a big caveat that if the recession powers along for a really long time and unemployment starts really hitting astronomical numbers, we might see folks choosing to start companies out of pure need to stay busy and have some kind of salary (even if it is a measly founder’s salary.)

In my opinion, the only way we would have seen more folks become founders is if they had struggled to find employment in any other sectors. If there had been a struggle for folks to regain full employment, then I would have came to a different conclusion, but I really just don’t see the mass exodus into the founder ranks happening. Think differently? Feel free to reply to this email with your thoughts.

What You Need to Know About…AI Regulations by Sector

In my last newsletter I did a broad, but deep-ish, overview into what AI regulations look like right now and what might cause regulatory agencies to take a look at what’s happening in the space sooner, rather than later. I’m pretty passionate about using AI to help grow industries where we struggle to hire enough employees or where scaling is hard without the help of technology. At Vol.1 Ventures, we have invested in a few AI companies that I believe that really make incredible strides in these areas. Since we invest in companies using deep tech and AI, I’ve begun doing some lobby work for AI-associated technologies. Needless to say lobbying around AI is…interesting. Politicians are worried about AI taking the jobs of their constituents. Agencies are scared that companies aren’t being honest about their algorithms and the capabilities of their tech.

I’ve spent the past few weeks talking to regulators and folks on the Hill about what they think regulations in AI look like and some are pretty interesting…though no sector comes out without any oversight so folks shouldn’t get too excited.

After spending a lot of time preaching the good word of AI to our elected officials, I think the best example of legislation we can expect to see coming is the Algorithmic Accountability Act of 2022, which would require new transparency and accountability for automated decision systems. Introduced in 2021 by Representative Wyden, this bill was an update of a similar 2019 bill. If you’re looking for frameworks that will need to be considered when lobbying for AI this bill does a good job of showcasing concerns.

Below are some of my sector-specific thoughts and predictions for your reading pleasure…

Banking, Finance, Fintech, Crypto…all the biggies

I used to say that I didn’t expect banking and finance regulations to ever explicitly cover AI. That being said, I don’t think I was as prepared to see AI get so fully utilized in finance so quickly. My hunch now is that by the end of the year, we have significant changes to this regulatory space. Credit risk assessment and claims processing are two areas that I believe to be at the highest risk for additional oversight. These two areas are getting bombarded with AI-based options and features so it’s pure insanity to think it hasn’t caught the eye of regulators already.

After my conversations in the past weeks, I also think we need to pay attention to the use of AI in AML and KYC products and features. I think more and more regulators want to explicitly know how these algorithms are being developed and what that code looks like. I expect to see much more scrutiny in how these products make decisions and how those decisions are used in risk management by financial (especially crypto) organizations.

The Federal Reserve has already stated that if banks “don’t have the appropriate governance, risk management and controls for AI, they shouldn’t use AI…” With that in mind, I expect that our traditional banking regulations will be expected to be met by those using AI within banking and finance operations. I also think that AI will get their own robust rules around fairness. Expect to see these rolling out for comment before the GPT4 sees the light of day.

I hope that companies innovating in this space remember that we still need the human factor in many investment and financial decisions. I’m wary of what will happen after an AI or ML-led fintech suffers great losses. This could be a debilitating red herring for the industry and will set back those working to do the right thing while building for the future.

For some additional reading, take a look at one of my favorite white papers from the Financial Stability Institute here.

AgTech

I’m spending this week in Ohio working on the family farm so I’ve thought a lot about what the implications on AgTech are once AI and ML become more heavily used. My biggest concerns are around accidental regulatory breaches such as an overuse of pesticides or use of a feed that has too many antibiotics. On one hand, agriculture is ripe for innovation. But on the other hand if an algorithm gets anything wrong and it causes a regulatory breach it has life-changing implications for the farmers using it. Nary a farmer can really cover the cost of most regulatory actions. I think the new wave of software that helps farmers during planting season are the most likely to evade regulations. Anything that uses AI around water use, pesticide use, or genetic systems using AI/ML for livestock or foodstuff crops will most likely be the first few regulatory actions in agtech.

One thing to remember though. Agriculture is a powerful lobby in the United States. If agriculture can effectively lobby for the effective use of AI and ML in their systems it will pave the way for other industries.

Healthcare, Biotech, Pharma

Here is the one instance I can say that the FDA is actually ahead of most other agencies and government entities. Because…The FDA already regulates the use of AI in medical devices and software. (I just learned that some startups operating in this space had no idea they needed to go talk to the FDA…if you know any healthcare startup that uses AI in any form to help with clinical decision-making and hasn’t spoken to the FDA please tell them to get on that ASAP!) The main reason that the FDA is ahead of the curve here is actually because guidance around CDS tools and medical device regulation was developed originally in compliance with the 21st Century Cures Act, which was created to streamline drug approval processes at the FDA, provide research funding, build effective EHR and health IT use cases, and the huge task of supporting health data interoperability. This Act was essentially an attempt to correct huge problems in how our EHR is utilized but it also led to a boom in clinical decision support technology being developed over the past few years. Unfortunately, healthcare is already one of the most biased systems in our country so a great deal of AI built has included those biases.

The healthcare continuum is not built for the continuous onslaught of AI that is coming so I am doubtful that this position of innovation will last very long. The WHO has also commented on the risks associated with AI. Therefore, I expect that we will actually see healthcare innovation in this space become stagnant in the next few years as the FDA and other agencies struggle to understand the technologies and how they are used in a practice setting. Many younger physicians have been trained on these AI and ML based technologies but older generations are still struggling with learning concepts around things like genetics that became more widely used after they completed their training. This will set healthcare on a demographic collision course that will also cause the more conservative agencies to take the side of the older physicians since they have traditionally served on FDA committees and served in positions of power at medical societies. I’d love to see startups using AI in this space start to focus on educational content and make a solid push in lobbying medical societies to change practice guidelines for more conscientious use of effective AI-based technologies.

In conclusion, the upside of seeing all of these regulations coming down the pipeline is that RegTech is also exploding. Startups have started using AI technologies to deal with the also exploding cost and complexity of compliance in this space. AI systems can quickly assess regulations and legal actions from around the world and see the impacts on different organizations. The cost savings can be massive for some companies. I’m excited by this area and how it can help mute the negative impacts on companies from additional regulatory oversight due to AI and ML within their technologies. I serve on an IMF task force that is doing a lot of research in the RegTech area so I hope that as these regulations grow so can the tech options available to startups looking to lessen their load.

Thanks for reading everyone! As always, let me know any feedback, topics you’d like to see, folks I should talk to, ya know the drill - email me at [email protected] and see y’all next week!

Stevie