The Long Term Costs in Ignoring regulatory or safety risks

TeslaThe Silicon Valley ecospace historically revolves on the promotion and funding of software technology companies. In fact, the PWC Moneytree Report relates that over $10.7 Billion dollars were invested in California in 404 deals, of which approximately $7.2 billion was in software.  Great profits margins.  And when modifications or corrections need to be made, they are described as “upgrade” or “performance enhancements”. But what happens when these SV entrepreneurs operate outside of their “reservation” of software and apply it other industries such as healthcare or safety? Can one go back and say the software has some kinks, let me upgrade it when lives or safety is at stake? And can these enterprises withstand the increased regulatory or legal scrutiny?

The costs to balancing “speed to market” in software with non-vetted, safety or healthcare products is a critical decision process in the consumer product’s development stage.  From Tesla’s Autopilot package to Theranos blood testing technology, the one lesson to be learned from these bumps on the road has to be the critical investment that must be made prior to commercializing safety and healthcare products. Established companies such as Procter & Gamble and the Detroit automobile companies have had considerable experience in this area, which these Silicon Valley companies should take heed. Not to follow that experienced route will impact the branding and incremental costs.

Soon after WWII, Japan began exporting goods that were associated with lesser quality and unreliability.  The products became associated with poor value.  In contrast, the Germans emphasized quality associated with higher pricing.  Their auto industry has hallmark products such as the Mercedes that match its reputation of low maintenance, durability and reliability.  The brand, Mercedes, is now world recognized with those qualities.  Branding is part of marketing and marketing focuses on consumer’s perceptions to match the realities.

What is meant by incremental costs?  One can skip the consumer testing portion to prior to commercialization.  Testing avoids crimps in the product.  But my biggest fear are contingency lawyers that add to the incremental costs to a product. By skipping consumer testing, one can increase the chances in litigation.  I once witnessed a consumer suing a retailer selling wall to wall carpeting since the plush carpet displayed residual footprints. Consumer healthcare products that include blood testing can generate very costly lawsuits that involve physical injury or even mortality. And these lawsuits don’t attempt to recover only compensatory damages but also punitive.  A million-dollar damage loss is multiplied manifold with punitive assessments, and, with class action lawsuits, the legal costs can be daunting.

And, in case of Tesla, the company announced that it would continue with its beta testing, still using actual humans as test dummies.  Imagine how such an announcement would resonate to a jury if another fatality occurs during its auto-pilot program. Years ago, the Pinto car settlements created a congressional furor when design flaws were not implemented in spite of the dangers of rear end collision.  Detroit felt that the litigation from occasional deaths was cheaper than retrofitting the cars.  The costs of litigation then skyrocketed. Sounds familiar?

So applying the software business model to other industries has to be re-evaluated.  The excuse that the technology has surpassed the understanding by regulators seems feeble in view of the realities. AirBnB, Tesla, or Theranos have to conform to the regulatory standards, not the other way around.  Currently, as I work in the healthcare field, I do consider these risks and include them in the marketing strategy.  Just ignoring them exposes the company to potential risks that can shut down the company. In one instance, a startup established a bus commuting business for software commuters. But received a cease and desist order to stop ferrying its clients.  Facing expenses of litigation, it decided to shut down.  Had it concerned itself with such obligation prior to offering its services, it would have survived – a lesson to other companies offering consumer services.


About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP,, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy.; For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
This entry was posted in Capital and Management, Entrepreneurship, Management and Capital, Marketing, Strategy. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s