As a venture capitalist or angel investor, you want your portfolio companies to scale quickly and achieve exits. But privacy & AI noncompliance can block their growth.

As you may know, the clock is ticking. New US state and international privacy laws are coming into effect in 2023. These laws follow on the heels of the European Union’s General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA).

If your startups are doing business in the US and globally, they must get ready to comply now.

Research reveals that many startups fail because they don’t comply with regulations in key markets they serve.

A cautionary tale: Bluesmart

The smart luggage startup Bluesmart is an excellent example of how regulatory non-compliance can cause startups to fail. They raised $4 million and kept their company running smoothly until a regulation stopped them in their tracks.

All US airlines enacted a regulation banning smart luggage with non-removable batteries. This gave Bluesmart no option but to shut down.

Non-compliance: A common reason for startup failure

When startup founders launch their company, there are many unknowns. They may not know what the future holds for their product, team, or industry.

Despite these unknowns, one thing is sure: that startup will fail if its founders don’t comply with the law.

Regulatory non-compliance is one of the most common reasons startups fail. Why? Consider the high-risk implications of an AI tool designed, developed, and deployed for 12 months that violates current and emerging laws later down the road.

This could mean that all the blood, sweat, tears, and money invested in the startup go down the drain — What a waste of time, money, and effort! — for the company’s founders, employees, and investors (that’s you)!

This is what happened to Bluesmart, which led to their failure. This illustrates why founders should make compliance a top priority.

Three reasons why compliance is so crucial for startups

1. To mitigate the risk of fines and penalties

Fines and penalties for non-compliance can be crippling for startups. In some cases, they can even force startups out of business. This is why it’s so important for startups to take compliance seriously and mitigate the privacy and security risks from the outset.

2. To protect their reputation

Reputation is everything for startups. They need to build trust with their customers and partners from day one. If they’re seen flouting the law, it will damage their reputation and make it harder to win business.

3. To gain a competitive advantage

Compliance can also give startups a competitive edge. By being compliant, they can show they’re trustworthy and serious about following the rules. This can help them win over customers and partners who may be reluctant to do business with startups that don’t take privacy and AI compliance seriously.

So how do you ensure your startups are ready when new privacy and AI laws become effective worldwide?

Four key areas your startups should focus on

1. Data Governance

Your startups must clearly understand their products’ regulatory landscape. This includes understanding which regulations apply, what they require, and keeping updated with changes. Thus, they must regularly engage with lawyers and privacy consulting firms.

Your startups should also have a data governance framework that includes a robust privacy management program. This program consists of the necessary privacy policies, practices, and processes for managing the collection, storage, and destruction of personally identifiable information of their customers and employees.

A privacy management program is essential for companies because it helps mitigate privacy and information security risks when dealing with personal data. As a foundation of the program, a well-designed data governance framework will help reduce these risks and ensure that your portfolio companies always comply with all relevant privacy and AI laws and regulations.

This data governance framework will also help them scale their international business by ensuring they have the necessary privacy policies and practices to manage their data effectively as they grow.

2. Employee Training

Employees should be trained on privacy & AI compliance requirements, including how to handle customer data. Innovation is critical in a startup, and employees should be encouraged to think outside the box. However, they must also be aware of the potential legal implications of their actions when dealing with personally identifiable information of their customers and employees.

Through Privacy By Design, engineers will build compliance into their product development process by investing in employee training. This will help avoid costly redesigns later on.

With employee training, employees will have the mindset to strike the right balance between compliance and innovation and be open to new ways that align with the law and best practices.

Employee training is also the beginning of weaving culture of privacy within the organization. This culture of privacy will give startups a competitive advantage as they scale their businesses internationally.

3. Customer Communications

Startups must focus on transparent customer communications to ensure privacy and AI laws compliance. They are responsible for informing customers about how their data is being used, shared, and stored.

They are also responsible for communicating the different privacy rights that customers can exercise when they want access to their data through DSARs. These privacy rights include the right to opt-out of data collection.

Companies can scale their business without legal trouble by informing consumers how their data is used. A robust privacy management program for consumer inquiries shows that a startup takes data privacy regulations seriously.

4. Third-Party Service Providers

Third-party service providers are essential to the success of many startups. They provide the outsourced expertise, resources, tools, and services needed to help startups grow and scale. However, it’s important to remember that these vendors may not be subject to the same privacy & AI laws as startups.

Thus, startups need to review their contracts with service providers to ensure they process personal data that complies with privacy & AI laws. In doing so, startups can mitigate risks and scale their businesses in a legally sustainable manner. This will help them create a competitive advantage, scale quickly, and achieve exits.

How to future-proof your investments

To mitigate the risk of non-compliance, you must ensure that your startups take a proactive approach. They need to anticipate legal changes and ensure their products are legally permissible.

They can’t afford to wait until they’re faced with a problem before they act. Startups can mitigate the risk of regulatory non-compliance and ensure their products are consistent with the regulations.

This can be done by working with privacy and AI compliance firms, keeping up to date with changes in the data privacy laws, and planning for contingencies.

By following these tips, you can help mitigate the risks associated with regulatory non-compliance and ensure that your startups are on the path to success.

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