There might be no more beloved image of the American entrepreneurial spirit than that of neighborhood kids who open a sidewalk lemonade stand on a hot summer day. With a little bit of “capital” from their parents — lemons, water, sugar, a card table, some markers and paper — hard work, and good sidewalk placement, children learn about how to start a business and earn some cash along the way.
However, not only are the hurdles to actually build a grown-up version of that business today enormous, but there’s also been a massive increase in government regulation to work in or start a small business in many industries. State-mandated occupational licensing involves a combination of education, training, exams, and fees to work in certain professions, with more and more would-be entrepreneurs impacted. Whereas in the 1950s just 5% of the workforce needed an occupational license, the share has grown to more than 25% of U.S. workers today. In 2003, the Council of State Governments estimated that more than 800 occupations were licensed in at least one state. These occupations span different sectors, salary ranges, and degrees of familiarity to consumers–from upholsterers to locksmiths to milk samplers to civil engineers. A full list of licensed occupations can be found here.
The growth in state occupational licenses (source).
But this growth in licensing also presents an opportunity for marketplace startups. As the low-hanging fruit of other services marketplaces get picked off, the more challenging regulated industries are the ones that remain. The artificial supply-constraint imposed by licensing and regulation makes these services verticals particularly interesting in the context of marketplace-building. Supply-constrained markets hold advantages because there’s already a large pool of demand that wants a particular service; if such marketplaces are able to win the supply side, they can capture a ton of value.
But marketplaces are nuanced and challenging businesses to scale, and for startups operating in regulated industries, there is additional complexity and difficulty. So what can founders and operators do when it comes to navigating the complexities that come with the territory in regulated industries? Where are the opportunities?
In a previous blog post co-authored with Andrew Chen, What’s Next for Marketplace Startups, we detailed how the licensing of workers was more critical in a “pre-internet” world, since licenses established consumer trust by signaling the skills or knowledge required to perform a job. But today, digital platforms can mitigate the need for (some) licensing by establishing trust and ensuring quality through other means — such as user reviews, platform requirements, and other mechanisms like pre-vetting and guarantees.
“Managed marketplaces” models in particular can be helpful in establishing user trust, because they intermediate parts of the service delivery, adding value by taking on functions like identifying high-quality providers, standardizing prices, and automating matching between demand and supply. As scrutiny around safety for marketplaces continues to rise, the importance of trusted labor becomes even more significant. In childcare, for instance, people don’t want to just see a list of all possible caregivers — they want to know with certainty that the providers they’re hiring are trustworthy and qualified, and a managed marketplace can capitalize on this user need by thoroughly vetting all supply.
Managed marketplaces can greatly mitigate the need for licensing because users trust the marketplace itself, particularly on the highly managed side of the spectrum. Such platforms can enable high-quality, but unlicensed, suppliers to offer services alongside licensed providers — and in doing so, promote entrepreneurship and alleviate supply constraints.
Not all service categories are created equal, however, and some are more suited to digital marketplaces than others. Depending on the particular dynamics of each industry, marketplace startups will have different entry points and strategies.
Besides all of the traditional lenses through which we evaluate all marketplace businesses, there’s some specific factors unique to categories that involve regulation that can help inform the best approach. And the sooner that founders and operators can think through and address these factors, the better for their company building.
Useful factors to consider when assessing opportunities for new marketplaces operating in a regulated industry include: (1) downside risk of unlicensed supply, (2) burden of licensing requirements, (3) existing industry satisfaction, (4) opportunity to lower prices, (5) market size, (6) latent demand, (7) underutilized assets to unlock supply, and (8) tailwinds around regulatory reform.
Of course, the framework outlined below is just a beginning point in evaluating opportunities for regulated services marketplaces. In addition to the opportunities arising from state occupational licensing, there’s also other forms of regulation — including other means of restricting businesses such as permitting and zoning — at the local (county or city) and federal level.
For some occupations, licensing is critical because there is a credible, acute threat to public health and safety. Few consumers would feel comfortable having surgery performed by an unlicensed doctor, even if they had great reviews. In these cases, it makes more sense to have a marketplace that makes discovery and accessibility of licensed providers easier — rather than expanding the marketplace with unlicensed providers.
But for other services, licensing burdens can outweigh potential risks, especially in fields where the potential for adverse impact on health and safety is minimal — like tour guides, florists, or interior designers, for example.
In other words, the tangible benefits of licensing and consumer attitudes are important to consider in designing the right marketplace approach. Of course, consumer perceptions are not fixed: it was inconceivable to many that users would want to sleep in strangers’ homes or get into strangers’ cars — yet the companies that made this possible (and established trust through other mechanisms besides licensing) are now massively valuable.
For categories where consumers are cognizant of risks to unlicensed supply, a more managed marketplace approach can make sense to establish greater trust.