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For Web startups with big ambitions, regulation increasingly on the radar

By Alexei Oreskovic

RANCHO PALOS VERDES Calif. (Reuters) - Internet startups are starting to see what could come between them and their ambitions: regulators.

Recent lawsuits and government investigations into high-flying “sharing economy” services have put the issue front and center. Now, Web companies developing services in everything from healthcare to transportation are crafting strategies for working with government agencies.

That's a marked change from a few years ago, when the mantra was, "Grow first, worry later."

“The issues of an Internet company 10 years ago were different because you weren’t affecting the real world,” Travis Kalanick, chief executive officer of car-ride service Uber, told Reuters at the Code technology conference in Southern California this week.

“Once you get in the real world, you’ve got a whole other thing you've got to deal with, and that’s where regulations and regulatory bodies and politicians and campaigns and all this stuff come into play."

This month, 15 taxi companies in Connecticut sued Uber for skirting state and federal regulations. The company faces scrutiny in several other states as well.

Kalanick said he would fight back with a "political campaign" employing consultants, lawyers and grassroots tactics.

As Internet services shake up industries, they must answer to state and local agencies. Take California’s little-known Bureau of Private Postsecondary Education, which threatened several computer coding “boot camps” in January with closure and fines unless they got licensed.

To some startups, the lessons of Uber and home rental service AirBnB, which is disputing claims by New York’s attorney general that some of its users effectively operate as illegal hotels, are cautionary tales.

“The day after we got incorporated, our first call was to our lawyers to discuss all the regulatory issues,” said the founder of a health app startup, who asked not to be identified because his company wants to keep a low profile.

"If you’re diagnosing somebody with something, all of a sudden you put yourself in a situation where you are going to be regulated pretty heavily," he said.

The proliferation of health apps, such as those that monitor heart rates or sleep patterns, could mean more Uber-like collisions.

In November the U.S. Food and Drug Administration warned Google-backed genetics startup 23andMe to halt sales of its $99 DNA test kits, because it had not received clearance from the agency. The company stopped offering consumers health reports shortly afterward.

Tech industry insiders say they understand the need for consumer safeguards, but they argue that regulations can be abused by businesses fending off upstart rivals.

Wesley Chan, a former Google manager, noted that the Federal Communications Commission in 2009 opened an inquiry into Google Voice, a voice service he helped launch, after complaints from AT&T Inc.

"Running to regulators is one tactic that they can use to thwart your growth,” he said. “It's an unfortunate fact, but one where you have to just be faster, stronger and better at playing the game than the incumbents.”

(Editing by Douglas Royalty)

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