How the Digital Services Act Affects US Tech Startups

How the Digital Services Act Affects US Tech Startups - Tech Digital Minds

Introduction: Why the Digital Services Act Matters for American Innovators

Over the past decade, the internet has grown into a powerhouse that fuels global business, communication, and culture. Along with this growth came new challenges: illegal content spreading unchecked, opaque algorithms shaping user experience, and online platforms profiting from data with little accountability.

To address these issues, the European Union (EU) introduced the Digital Services Act (DSA)—a sweeping regulation designed to make the internet safer, more transparent, and more accountable. While it’s an EU law, the DSA’s impact reaches far beyond Europe’s borders.

For US tech startups, the DSA is both a challenge and an opportunity. Even if a company is based in San Francisco or Austin, if it serves EU users, it must comply. And because of the so-called “Brussels Effect”—where EU laws set global standards—many US startups may need to adapt even if they don’t directly operate in Europe.

The big question is: Will the DSA slow down US startup innovation with regulatory burdens, or will it help create a more trustworthy digital ecosystem where smaller players can thrive?

What Is the Digital Services Act?

The Digital Services Act (DSA), officially enforced in 2024, is part of the EU’s effort to regulate the digital economy. It complements the Digital Markets Act (DMA), which focuses on competition and gatekeeper platforms.

The DSA’s central goal is to create a safer digital space where users’ rights are protected and platforms are held accountable for the content and services they host.

Core Objectives

Protect users from illegal and harmful content.
Increase transparency in online advertising and algorithms.
Create accountability for platforms, marketplaces, and hosting providers.
Level the playing field for businesses in the EU digital economy.

Who Must Comply With the DSA?

The DSA applies to all intermediary services that operate in the EU market, regardless of where they’re based. This includes:

Hosting services (cloud, web hosting).
Online platforms (social media, app stores, marketplaces).
Very Large Online Platforms (VLOPs) and Very Large Online Search Engines (VLOSEs) with over 45 million EU users.

That means a US SaaS startup with just a few thousand European clients may fall under the DSA’s scope.

Key Provisions of the DSA

The DSA introduces several important requirements that affect how startups build, run, and monetize their platforms.

1. Content Moderation & Illegal Content Removal

Platforms must:

Remove illegal content promptly when flagged.
Provide transparent procedures for user complaints.
Offer appeals mechanisms to prevent over-removal.

2. Transparency Requirements

Disclose how algorithms recommend content (e.g., social media feeds).
Explain advertising practices and why users see certain ads.
Offer opt-out options from profiling-based recommendations.

3. Advertising & Targeting Rules

Ban targeted ads based on sensitive personal data (religion, political beliefs, sexual orientation).
Limit ads targeting minors.
Require clear disclosure of ad sponsors.

4. Risk Assessments for Large Platforms

VLOPs must conduct annual risk assessments on how their systems impact:

Public discourse
User rights
Election integrity
Disinformation

While most US startups won’t hit VLOP thresholds, the compliance culture trickles down to smaller platforms as well.

Why It Matters for US Tech Startups

1. The Brussels Effect

Just like GDPR, the DSA will likely influence global digital standards. Startups that want to scale internationally will adopt DSA-like compliance by default.

2. Compliance Costs

For early-stage startups, compliance adds legal and operational expenses. Hiring a compliance officer, building reporting mechanisms, and auditing algorithms require resources many startups lack.

3. Competitive Landscape

Ironically, while regulation burdens startups, it may also level the playing field. Giants like Meta, Google, and Amazon face stricter scrutiny, giving smaller players a chance to compete on trust and transparency.

4. Market Access

Ignoring the DSA risks losing access to the EU market, which represents 447 million consumers—a huge growth opportunity for US startups.

Case Studies: How Startups Might Be Affected

SaaS Platform (B2B Tool)

A US-based SaaS company offering project management tools to EU clients must:

Provide clear data protection and algorithm disclosure.
Implement a content moderation policy if users share files or communication.

E-Commerce Startup

An American e-commerce site selling to EU customers must:

Verify seller identities.
Prevent counterfeit and unsafe products.
Disclose how product recommendations are generated.

Social Media App

A new US-based social platform with EU users must:

Establish complaint handling systems.
Offer transparent moderation.
Disclose ad practices and targeting criteria.

Risks of Non-Compliance

The DSA is strict when it comes to enforcement:

Fines up to 6% of global annual turnover for violations.
Possible suspension of services in the EU.
Long-term reputational damage.

For startups, a single compliance failure could mean bankruptcy or market exit.

Opportunities for Innovation

Despite concerns, the DSA offers unique opportunities:

RegTech Growth – Startups can create tools for DSA compliance (content moderation, algorithm audits).
Transparency as a Feature – Startups can stand out by branding themselves as privacy-first and compliance-ready.
Trust-Driven Adoption – Consumers are more likely to trust smaller companies that are transparent compared to Big Tech.

Global Ripple Effects

The DSA is part of a larger global trend toward tech regulation.

United States: Discussions around a “US GDPR” are gaining traction.
UK & Canada: Both are considering regulations inspired by EU frameworks.
Global Startups: Early compliance with DSA may future-proof businesses.

Like GDPR, the DSA could become the template for global digital law.

The Road Ahead for US Startups

Short-Term Actions

Conduct compliance audits.
Update terms of service and ad policies.
Build transparent reporting mechanisms.

Long-Term Strategy

Invest in legal and ethical design teams.
Use trust and compliance as a competitive advantage.
Explore RegTech partnerships to reduce compliance burden.

Conclusion: Challenge or Opportunity?

The Digital Services Act is not just another regulation—it is a paradigm shift in how online services are governed. For US startups, it creates new hurdles, but also new opportunities to build platforms that prioritize trust, transparency, and accountability.

In the long run, startups that embrace compliance early will not just survive but thrive—positioning themselves as global leaders in ethical digital innovation.

The future of tech isn’t just about building fast—it’s about building fair, transparent, and trustworthy systems that can stand the test of global regulation.

James