There are many standards and certifications available in the compliance landscape. With so many frameworks out there, it can be challenging for investors to know which compliance certifications to look for in a startup before investing their money.
As an investor or venture capitalist, you should look out for the compliance a prospective startup before investing in the company. You don’t want the operations of a startup that you have recently funded stifled by huge penalties and fines for breaching compliance laws.
Failure for startups to adhere to set compliance laws can put the business in the red. Many companies caught breaching compliance laws never get back on their feet. The scenario is worse for startups that have barely made a mark in their fields.
What is a Compliance Certification?
Compliance means that a startup successfully complies with specific standards and regulations set by the government, their industry, or both. Certification means that a startup has passed a compliance check done by either a third-party testing organization or self-certified.
If you are thinking of starting a business or investing in a startup, below are some compliance certifications you should look out for before committing your resources or time.
1. SOC 2 Audit
SOC 2 refers to an auditing standard that the American Institute of Certified Public Accountants (AICPA) maintains to test a startup or organization’s internal controls for privacy and information security.
The objective third-party system tells customers and other stakeholders that they can trust a startup to handle information with the utmost care.
As an investor, the SOC 2 certificate is a must-have for prospective startups that you wish to invest in or support. It’s the most sought after compliance certificate by startups, particularly SaaS and other software providers that use the cloud to store data. It is also essential for startup businesses looking to move upmarket.
Enterprise companies expect all startups to meet similar compliance requirements and procurement cycles as other vendors. Thus, in many cases, enterprise customers will require startups to become SOC 2 compliant before doing business with them. Many will prefer working with startups already compliant rather than wait for one.
CCPA stands for California Consumer Privacy Act. It’s another regulation that many SaaS or tech startups must follow. It grants California residents the absolute right to know which entity is collecting their personal information and what they intend to do with it. They can also access their data, have it deleted, refuse its sale, or exercise these and other rights without discrimination.
CCPA applies to all companies that do business in California, collect information about its residents, and meet certain size thresholds. Since California is one of the largest economies in the world that does business with almost all the other U.S. states, CCPA applies to most organizations nationwide.
General Data Protection Regulation (GDPR) refers to an EU law regulation on data privacy and protection in the European Economic Area (EEA) and the European Union. It also addresses any transfer of personal or customer data outside the EU.
GDPR is a must-have compliance requirement for startups marketing their business to European residents. Therefore, these companies must understand and implement GDPR requirements.
4. ISO 27001
An increasing number of tech startups are opting to adopt the ISO 27001 compliance standard. The International Organization of Standardization (ISO) developed the ISO 27001 to protect customers’ sensitive information that organizations collect, store, process, or transmit.
ISO 27001 is part of a larger family of standards, and it provides requirements for information security management systems (ISMS). Startups use it to manage the security of their assets, including financial information, employee details, intellectual property, or any other information entrusted by third parties.
The Health Insurance Portability and Accountability Act (HIPAA) of 1996 is a U.S. legislation that provides data security, privacy, and other security provisions required to safeguard medical information.
The Health Information Trust Alliance (HITRUST), started in 2007, helps organizations from all industry sectors (but especially healthcare) manage data, compliance, and information risk. HITRUST Alliance offers the certification that allows startups, vendors, and other covered entities to demonstrate their compliance with HIPAA requirements using a standardized framework.
7. PCI DSS
PCI DSS full form is Payment Card Industry Data Security Standard. It’s a set of security standards that five American credit card companies formed in 2004 to secure debit and credit card transactions against fraud and data theft.
8. NIST Compliance
The National Institute of Standards and Technology (NIST) develops standards, technology, and metrics to drive economic competitiveness and innovation for the U.S. science and technology industry. NIST is a non-regulated government agency.
Compliance is good for business. A startup that meets all its industry and legal requirements has smooth operations. On the other hand, failure to comply has costly consequences that will inevitably slow down business growth.
As an investor, look out for the following compliance certification in a prospective startup: SOC 2 audit, CCPA, GDPR, ISO 27001, PCI DSS (for credit card transactions), NIST, as well as HIPAA and HITRUST (for the healthcare sector).