Could the Austin City Council’s recent moves to regulate “sharing economy” companies put a freeze on Austin innovation and outside investment?
That question is being debated by entrepreneurs and venture capitalists, some of whom say that by restricting ride-hailing services Uber and Lyft and short-term rentals, the city is sending a negative message about its commitment to the tech startup community.
The dialogue got more heated when Mike Maples, a Silicon Valley venture capitalist with longtime ties to Austin, weighed in on Twitter recently that his firm would no longer invest in on-demand companies in Austin because local government is “too hostile.”
@JoshuaBaer Yep. FLOODGATE now has policy not to invest in on-demand companies in Austin. Local government too hostile.— Mike Maples (@m2jr) February 25, 2016
That provoked an outcry by startup founders that Austin was in danger of driving away early-stage investment dollars that already are hard to come by.
“The City Council is telling the entrepreneurial community that if you would like to innovate and potentially disrupt an existing industry, you should do it elsewhere,” said Richard Bagdonas, a serial entrepreneur and founder of medical software company MI7.
Supporters of these regulations argue that the City Council isn’t trying to hurt the tech community but is enacting rules to promote safety, in the case of ride-hailing companies, and to preserve the residential character of neighborhoods. And Austin isn’t alone in passing these sorts of regulations — many American cities and states are grappling with how to regulate sharing economy companies.
“A lot of what we’re dealing with now is the right role for government at the intersection of government and the sharing economy businesses,” said Mayor Steve Adler, who voted for both regulations after he couldn’t get enough votes to pass less-stringent versions.
“This city cannot and should not abdicate its role to help ensure safety in the community,” he said. “But how it does that is something that needs to innovate and evolve.”
A problematic investment
Maples, founder of venture firm Floodgate, which has backed a number of Austin startups, said in late February that his decision to step out of the Austin market is based on risk factors.
“Startups are impossible to begin with, and if I’m going to invest in one, I have enough uncertainty without worrying about what the government’s going to do,” Maples said. “If I invest in a company that has high consumer appeal and could end up facing regulatory issues, that becomes a problematic investment.”
The discussion centers around two closely watched Austin City Council votes. Council members voted 9-2 last month to limit certain types of short-term rentals listed by companies like Austin-based HomeAway and Airbnb. This meant that all “Type 2” short-term rental owners, which is the type of rental where the owner doesn’t live on-site, will be banned in residential areas by April 1, 2022.
That followed another 9-2 vote in which council members decided that Lyft, Uber and other ride-hailing companies must require their drivers to complete fingerprint-based background checks, a requirement that the ride-hailing companies aggressively lobbied against. (Voters will get a chance to weigh in on these regulations in May, when an ordinance drafted by the ride-hailing companies is on the ballot.)
It was this decision in particular that generated a backlash against City Council Member Ann Kitchen, one of the main architects of the proposal.
A group called Austin4All attempted to force a recall vote on Kitchen by filing a petition with the city clerk. But on Friday the clerk rejected that petition due to a paperwork omission. The biggest backer of the anti-Kitchen effort was Joe Liemandt, founder of software company Trilogy. He contributed $20,000 to Austin4All.
Austin economist Brian Kelsey said Austin is one of a number of tech regions facing collisions between companies developing disruptive technology and those charged with regulating it.
“Public policy is always going to be playing catch up with technological innovation,” Kelsey said. “That’s true at the federal level and especially true at the local level. But when we have questions of public safety or how we tackle land use and neighborhood planning, of course the city government has to step in and take a position. “
According to research done by city of Austin staffers, at least five other major U.S. cities, including Houston, conduct the background checks for ride-hailing drivers rather than letting the companies conduct their own background checks. And in other U.S. cities, such as New York, short-term rentals for under 30 days are forbidden.
A slap in the face?
For HomeAway co-founder and CEO Brian Sharples, the clampdown on short-term rentals feels personal.
“I’m not sure it was intended to be a slap in the face of HomeAway, but it’s a little embarrassing for us to essentially have our prime product be illegal in the town in which we operate,” Sharples said.
Launched in 2005, HomeAway has built a network of websites with more than 1 million vacation home listings in almost 200 countries, making it the world’s leading platform for online vacation rentals.
The company, which was acquired by online travel giant Expedia in December for $3.9 billion in cash and stock, has 1,300 employees in Austin.
Sharples said Austin needs to decide whether it wants to be welcoming to startups that are using technology to build new kinds of businesses.
“It does send a signal to some entrepreneurs that maybe the city isn’t the friendliest to innovation and change,” Sharples said. “City Councils will come and go, and opinions will change. Unfortunately, the actions of a small group do reflect on the impressions that people outside the city have.”
Austin entrepreneur Dan Graham said it also matters what message the city is sending investors.
“One of our biggest challenges as a city is convincing venture capitalists to invest more dollars here,” said Graham, founder and CEO of BuildASign. “The availability of capital is what encourages entrepreneurs to start businesses, and it encourages the entrepreneurs we have to stay in Austin.”
The Maples tweet did not go unnoticed at Austin City Hall. Adler downplayed the comment as just one man’s opinion, pointing to a recent quote from Dallas billionaire Mark Cuban as evidence of investor support for Austin.
“Every startup stands on its own merits,” Cuban told CultureMap Austin. “As long as the rules apply to all competitors, then it would depend on the economics of each deal.”
Adler said Maples’ comments don’t change the “fundamentals” of Austin being an innovative city “where good ideas become real.”
“Most investors like Mark Cuban know that Austin is still vibrant and our investment community is growing,” Adler said.
Kelsey said it’s important to note that the entire tech community is not aligned in the belief that the city’s position is harmful. “There are some companies here that could stand to benefit from whichever direction the city decides to go on the sharing economy,” he said.
But for Austin City Council Member Ellen Troxclair, who voted against both regulations that the tech community is unhappy about, Maples’ message was exactly what she feared.
“To me it was really a display of how over-regulation has a tangible economic impact,” Troxclair said. “One of the reasons, clearly, that Austin has been so successful is because of our image as this innovative forward-thinking city, and yet the city is making decisions that are going to negatively impact entrepreneurs and the tech community.”
The Kitchen recall effort has raised the question of what the political consequences could be for the current council members. There are about 100,000 people employed in the tech community in Austin.
Local Democratic political strategist David Butts — who has worked on the campaigns of Adler and other City Council members — said there’s no doubt that the council’s votes on ride-hailing and short-term rentals will have an influence in the 2016 council elections. He said some incumbent council members who voted for the new regulations could face opponents who will campaign on the opposite side of this issue.
Butts says he wants to frame the discussion around the attempted “corporate takeover” of the Austin City Council and the effort to “undo what are reasonable laws for the public’s interest to benefit a profit margin for a multibillion-dollar corporation.”
In particular, Butts said he is concerned about the May vote on the ride-hailing ordinance. He helped set up a political action committee to fight it.
“(Uber and Lyft) have enough money to be successful,” he said, and are skilled at building political support among their users.
“Can Austin resist that?” he said. “We’ll find out.”