There is currently an overabundance of startups pitching themselves as uniquely positioned to change the world. Everything from artificial intelligence enabled health-tech startups to food-delivery services argue their product/service is the solution to a “global problem”.
Only a few of these claims are accurate. Companies do, however, have the opportunity to influence broader social change without relying on exaggerated visions of “game-changing solutions to social problems.”
This is especially true for companies with business plans that require a significant change in law in order for them to be successful. Some of Silicon Valley’s most successful companies–including Uber, AirBnB, and Tesla–have ensured their success by accelerating policy changes to disrupt markets. This strategy was coined “Regulatory Entrepreneurship” by Elizabeth Pollman and Jordan M. Barry, who have synthesized the success stories of these companies. This strategy is carried out in two ways, depending on the complexity of the existing regulatory landscape.
Capitalizing on Legal Grey Areas:
Here, the company introduces a product or service in a legal grey area of a regulated industry, such as housing or transportation. Because policymakers fail to anticipate rapid innovation, like ride-sharing, regulatory entrepreneurs have the opportunity to scale rapidly without the impediment of local regulations. When regulators take notice of the company’s activities and begin to introduce specific regulations or attempt to block the company from entering new markets, regulatory entrepreneurs can leverage the demand for their product/service to mobilize users to advocate on behalf of the company. This is the strategy taken up by AirBnb, Uber, and DraftKings to challenge housing, taxi, and gambling regulations, respectively.
The utility of this strategy is clear when the success of Uber and Lyft is compared against that of another ride-sharing company, Sidecar. Sidecar was actually the first peer-to-peer ride-sharing service to launch in 2012. Lyft followed Sidecar by 3 months; Uber announced its peer-to-peer service one day before Lyft’s launch. Despite its head start, Sidecar ultimately lost the market by going to regulators for permission to launch in new cities.
Uber and Lyft notoriously took a “permissionless entrepreneurship” approach as they expanded rapidly. Once each business built traction and a diverse consumer base, it was able to mobilize customer demand to push for friendly regulations. Despite the controversy, they won the battle for both the market and favorable regulations. Pressured by the impressive demand for ride-sharing service, cities shifted their efforts to deregulating the taxi-industry rather than stifling the competition introduced by Uber and Lyft.
Regulatory Changes as Barriers to Entry:
In the second scenario, a company enters a highly regulated area where the difficulty of compliance and a company-specific carve out serves as a barrier to entry for competitors. This strategy varies from the former because it typically requires policy change before entering the market. Tesla’s direct-sales model illustrates this strategy.
In order to get Teslas on the streets without following the prevailing dealership model, the company had to lobby for the modification of antiquated regulations requiring cars to be sold through auto dealerships. Given the price tag on its vehicles, Tesla has smaller number of stakeholders interested in obtaining its product than platforms like Uber and AirBnb. Regardless, the substantial overlap between affluent eco-conscious potential buyers and those in charge of setting statewide regulations created an opportunity for Tesla to leverage.
Through inventive lobbying efforts, Tesla obtained narrowly drafted carve outs that essentially only permit Tesla to forgo the auto dealership requirement. This carve out for Tesla’s direct sales model serves as a regulatory moat for the company. (Note that the company continues to battle against franchise regulations in Texas, Connecticut, Nebraska, New Mexico, Oklahoma, South Carolina, and West Virginia).
Regulatory Entrepreneurship vs. Blitzscaling
How can companies learn from this approach? Regulatory entrepreneurship bears key similarities to blitzscaling, a strategy popularized by Reid Hoffman. Blitzscaling is a strategy where companies grow rapidly with negative unit economics (when the cost a company incurs to acquire new customers exceeds the revenue the customers generate) in order to capture a market.
Companies that blitzscale quickly and strategically grow revenue, customer base, and the organization. This strategy is important in industries with network effects because the firm that secures the most customers will also have the most valuable service. For this reason, the most-notable platforms–PayPal, LinkedIn, Facebook, Uber, Airbnb–of the past two decades all applied some elements of blitzscaling.
These two strategies have been similarly used to explain the success stories of companies entering new markets, with a few distinctions. Blitzscaling startups grow rapidly into markets that have not fully formed while regulatory entrepreneurs grow rapidly into markets where the rules have yet to be determined. Blitzscalers “move fast and break things” to obtain a dominating share of an emerging market. Regulatory entrepreneurs scale rapidly in order to obtain easily mobilized and powerful stakeholders who can advocate for policy built around the needs of the company. Both are ultimately seeking profits.
In short, blitzscaling creates markets. Through regulatory entrepreneurship, companies can intentionally use policy as a tool to open new markets. Understanding regulatory entrepreneurship can not only help companies gain the benefits of blitzscaling, but also provides them with a specific mechanism by which they can disrupt consumer-harming regulations.
City-level taxi and zoning regulations created poor transportation options and monopolies on unused space. Uber and Airbnb blitzscaled to dominate the ride- and home- sharing space. But through regulatory entrepreneurship, the companies changed the rules that applied to transportation and housing. Through innovation, these entrepreneurs created new economic opportunities and forced regulators to address policy failures.
Beware of Regulatory Risks
Regulatory entrepreneurship inherently requires companies to assume greater risk than blitzscaling alone. In addition to being threatened by competitors, the success of regulatory entrepreneurs can easily be upended by an unfriendly decision in the law. Bluesmart, one of the many smart luggage startups, shut down after airlines updated their policies to prohibit luggage with non-removable batteries. Players in the cannabis industry face constant regulatory uncertainty and the risk of getting shut down. This hurts their ability to scale, sustain market power, and obtain capital.
Napster’s demise epitomizes the potential downside of regulatory entrepreneurship. Napster tried to disrupt the music industry by leveraging the uncertainty over whether digital music files were protected under copyright law. Napster pitted its politically valuable consumer base, mostly college students, against the music industry’s powerful lobbyists and lawyers. However, the company’s conflict with federal law proved too difficult to overcome. The company was unable to obtain favorable law and was eventually forced into bankruptcy.
With Power Comes Responsibility
Despite these risks, regulatory entrepreneurs are able to push the needle and set policy through their position in the market. After disrupting local zoning regulations, Airbnb moved on to prevent housing discrimination policy on its platform. While history is riddled with bad private actors in the housing space, Airbnb set policy for its platform that went beyond both local and national laws to fight discrimination in housing. Airbnb now takes more steps than required by law to prevent housing discrimination, protecting a broader classification of minorities–like LGBT individuals. Additionally, the platform is able to enforce its policy against owner-occupied homes and single-family homes that, if rented privately, would be exempt from the Fair Housing Act.
The success of Airbnb also serves as a cautionary tale on why regulatory entrepreneurship must be applied responsibly. While Airbnb has advanced non-discrimination policies in housing and created new opportunities for unused space, the platform has undone significant progress in the fair housing arena. The platform has also enabled a significant portion of low- and middle-income housing to be shifted to the short-term rental market. This has had a disparate impact on minorities–reducing their living options and increasing rents. This effect is especially prevalent in hot markets like San Francisco and NYC.
Political posturing through non-discrimination policies cannot override Airbnb’s position as a foe to fair housing. These externalities do, however, serve as an opportunity for future regulatory entrepreneurs and policy makers. Bungalow, Starcity, Roomi, Hubhaus, WeLive, Ollie and Common have all entered the co-living space to apply Airbnb’s success to living options rather than vacation rentals. As they expand, they will gain the power to set their own standards to further diversity in housing. These companies have the potential to create new and safe living options for minorities and pressure other housing providers to implement similar diversity initiatives. When operating under the pressure of the private market, the effects of the policies actualize rapidly compared to public sector.
It’s clear that corporations and people don’t have to choose between seeking profits or an impact through their work. A company’s primary mission doesn’t have to be advancing inclusive corporate culture, solving the air pollution crisis, or democratizing access in order to benefit a wide number of people and set policy. Regulatory entrepreneurs are clear illustrations of this.
Emerging markets provide great opportunities to set policy at scale. By making policy changes central to its business plan, regulatory entrepreneurship is a thrilling vehicle for impactful work. Pursuing these opportunities is the best way for entrepreneurs and other professionals to create value and move the needle. That being said, every company entering and shaping new markets should be mindful so they cultivate a future worth living in.
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