July 18, 2015

Expensive Licensing Can Drive Away Entrepreneurs

Christopher Koopman

Senior Affiliated Scholar
Summary

As of July 1, Virginia now licenses ridesharing companies — such as Uber and Lyft  —  as “transportation network companies.” This is part of the legislation signed into law this past February, which allows these companies to operate throughout the commonwealth. Among other requirements, this new law also requires ridesharing companies to pay an initial licensing fee of $100,000 and another $60,000 each year to renew their license.

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As of July 1, Virginia now licenses ridesharing companies — such as Uber and Lyft  —  as “transportation network companies.” This is part of the legislation signed into law this past February, which allows these companies to operate throughout the commonwealth.

Among other requirements, this new law also requires ridesharing companies to pay an initial licensing fee of $100,000 and another $60,000 each year to renew their license.

While both Uber and Lyft celebrated this as a step forward for ridesharing in Virginia, the legislation could ultimately serve to hinder continued competition and innovation in on-demand transportation beyond these large, established companies.

In fact, the Transportation Network Company (TNC) designation — and the costly licensing requirements that go along with it  —  are an instant win for the Uber and Lyft.

Organizing and running a successful start-up is expensive and complicated enough, and there are plenty of expenses that a new ridesharing firm would have to incur to build, test and ultimately deploy its app for popular use. These types of natural barriers to entry are inherent in any enterprise.

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The TNC law, however, creates artificial barriers to entry by requiring additional costs that are not related to running a ridesharing company, but are simply necessary to purchase permission from the commonwealth for the privilege of operating within its borders.

And while $100,000 might seem relatively insignificant when viewed in the context of billion-dollar companies like Uber and Lyft, the fee may ultimately make it too costly for smaller companies to enter the market and compete with the established players.

Imagine, for example, a young entrepreneur who thinks she might have the next great ridesharing app. If she simply wants to test the app in and around Arlington or Richmond, she would first need to pay $100,000 to make sure she is operating legally. This is in addition to all the costs associated with building her app, as well as all of the other costs necessary to comply with the rest of the law.

Under the new law now in effect, she will likely have to raise hundreds of thousands of dollars to release her app and figure out whether it is even ready for popular use. It is entirely likely that she will simply decide not to pursue her idea. At the very least, she would likely choose not to pursue it in Virginia.

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Outside of Virginia, this issue is still far from settled, and many cities and states are still deciding how they will treat ridesharing firms. It should be an opportunity to re-evaluate their entire regulatory approach in light of how the market has changed.

Virginia’s efforts to do so are laudable, but they fall flat. And policymakers in other jurisdiction should look elsewhere for examples of how to get it right.

If every state were to adopt Virginia’s approach, a single ridesharing start-up could be faced with $5 million worth of costs to simply get the licenses necessary to deploy their app across the country.

Uber and Lyft may celebrate Virginia’s TNC law, but not because it serves consumers’ needs. Instead, it will likely put the brakes on continued competition in Virginia’s ridesharing market.