Regulatory Hacking

A Playbook for Startups
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Named by Inc. magazine as one of the Ten Best Business Books of 2018

Every startup wants to change the world. But the ones who truly make an impact know something the others don't: how to make government and regulation work for them.

As startups use technology to shape the way we live, work, and learn, they're taking on challenges in sectors like healthcare, infrastructure, and education, where failure is far more consequential than a humorous chat with Siri or the wrong package on your doorstep. These startups inevitably have to face governments responsible for protecting citizens through regulation. Love it or hate it, we're entering the next era of the digital revolution: the Regulatory Era.

The big winners in this era--in terms of both impact and financial return--will need skills they won't teach you in business school or most startup incubators: how to scale a business in an industry deeply intertwined with government.

Here, for the first time, is the playbook on how to win the regulatory era. "Regulatory hacking" doesn't mean "cutting through red tape"; it's really about finding a creative, strategic approach to navigating complex markets.

Evan Burfield is the cofounder of 1776, a Washington, DC-based venture capital firm and incubator specializing in regulated industries. Burfield has coached startups on how to understand, adapt to, and influence government regulation. Now, in Regulatory Hacking, he draws on that expertise and real startup success stories to show you how to do the same. For instance, you'll learn how...

  *  AirBnB rallied a grassroots movement to vote No on San Francisco's Prop F, which would have restricted its business in the city.

  *  HopSkipDrive overcame safety concerns about its kids' ridesharing service by working with state government to build trust into its platform.

  *  23andMe survived the FDA's order to stop selling its genetic testing kits by building trusted relationships with scientists who could influence the federal regulatory community.

Through fascinating case studies and interviews with startup founders, Burfield shows you how to build a compelling narrative for your startup, use it to build a grassroots movement to impact regulation, and develop influence to overcome entrenched relationships between incumbents and governments. These are just some of the tools in the book that you'll need to win the next frontier of innovation.

Praise

“A groundbreaking book and an immensely important addition to the entrepreneur’s reading list.”
—STEVE BLANK, author of The Startup Owner’s Manual
 
“Evan Burfield’s book is required reading for anyone who wants to succeed in the Third Wave of the internet economy, where startups will disrupt massive industries and the policy framework that shapes them.”
—STEVE CASE, chairman and CEO of Revolution LLC, cofounder of AOL, author of The Third Wave
 
“Large corporations can throw their weight behind laws and regulations that favor them. What can startups do? Thankfully, Evan Burfield has some answers.”
—BETH COMSTOCK, former vice chair of GE

“Evan Burfield explains why Silicon Valley’s distaste for government and government-regulated markets is misguided. Bringing these markets into the twenty-first century can have enormous positive impact on people’s lives—and provides the next great opportunity.”
—TIM O'REILLY, founder of O’Reilly Media, author of WTF?: What’s the Future and Why It’s Up to Us
 
“I’ve seen too many startups fail because they aren’t prepared to deal with regulation, while just a few succeed by finding ways to collaborate with government. Here, finally, is the book that gives entrepreneurs the knowledge, tools, and inspiration they need to navigate the messy world of regulation.”
—JONATHAN ORTMANS, president of Global Entrepreneurship Network

Excerpt

Chapter 1

 

Regulatory Hacking

 

Uber: The Iconic (Wrong) Example

 

The first time Uber entered my consciousness was in late October 2011, which just so happened to be the same week that Donna Harris and I first met. Rachel Holt, Uber's then general manager for the D.C. region (and now head of North America), had reached out, offering free ride credits to me and other tech CEOs, lobbyists, and media personalities in D.C. I received $50 in credits and was encouraged to pass the same offer on to any of my "influential" friends.

 

Keep in mind, at the time, Uber was a scrappy, relatively unknown startup.

 

On the evening of November 18, 2011, Rachel flipped a switch and Uber began quietly testing their luxury-sedan-hailing service on the streets of Washington, D.C. Armed with an app-powered, car-summoning technology and already operating in a handful of cities, the company seemed to know almost immediately that it was in for a bumpy ride in the nation's capital.

 

While Uber had run into some minor regulatory and licensing speed bumps in places like San Francisco, New York, and Chicago, D.C. presented the first major regulatory resistance. Not two months after Uber started operations in D.C., Ron Linton, the chairman of the D.C. Taxicab Commission, declared that Uber was operating illegally. The following morning, Linton hailed an Uber and routed the driver, Ridha Ben-Amara, to D.C.'s Mayflower Hotel. When they pulled up in front of the hotel, Taxicab Commission enforcement officials were already there waiting to impound Ben-Amara's Lincoln Town Car and slap him with $1,650 in fines for, among other charges, not holding a chauffeur license, operating an unlicensed taxi, and charging an improper fare.

 

Which is how I found myself, shortly before Christmas, in the living room of the DuPont Circle row house cum startup office of iStrategyLabs, a digital agency in D.C. owned by Peter Corbett, a tireless advocate for the D.C. tech scene and a founder of the D.C. Tech Meetup. With Uber in dire straits in D.C., Rachel had reached out to Peter, who had quickly convened a war council of leaders in the D.C. tech community. The room crackled with the feeling that this was a pivotal moment for everything we'd been working toward. If D.C. were the first city to shut down Uber, then our burgeoning credibility as a city where people could innovate would be ruined. This wasn't about Uber; this was about protecting this scrappy upstart from Big Taxi. We made plans, determining who could reach which city councilmembers or the mayor, how we could circulate petitions, who could engage what reporters. It was, in a word, a movement. It was more about us and what we believed than about Uber, and we were organizing.

 

I had a strong relationship with Mayor Vincent Gray, who was an advocate for the startup community in D.C. I emailed my friends in his office and stressed that if Uber were shut down, it would irreparably damage our shared vision for the D.C. startup community. Other people reached out to Mary Cheh, David Catania, Jack Evans, and David Grosso, all councilmembers with some sympathy to the tech community.

 

In parallel, Travis Kalanick sent a note to Uber's small but already fanatical customer base in D.C., most of whom, by dint of Uber's launch strategy, were influential people. His note encouraged everyone to write to their councilmember and made it one-click easy to do so. Travis and Rachel gave interviews with local and national reporters, strongly emphasizing the theme of Big Taxi trying to squash an innovative upstart offering better service at a reasonable price.

 

Before Uber, getting around the nation's capital via taxi was at best an outmoded hassle and at worst a headache-inducing nightmare. I can remember spending hours trapped on the congested Washington Beltway on sticky, hundred-degree July afternoons, accompanied by a driver who refused to flip on even the lowest setting of air conditioning; or standing on the curb in freezing January temperatures on K Street, arm outstretched, and after finally catching a driver's attention, learning that he's only commissioned to pick up and drop off in the District of Columbia and legally unable to take me ten minutes across the bridge into Virginia. Taxis in D.C. were also notorious for refusing to go into the historically black neighborhoods in D.C. or pick up people who didn't look "safe." Mayor after mayor had promised to reform the D.C. taxis-at a minimum to get them to start accepting credit cards-but had been thwarted by the entrenched and powerful D.C. Taxicab Commission.

 

The citizens of D.C. were ready to hear a story about someone taking the fight to the taxis.

 

That week in December 2011 marked the start of a long and grueling fight between Uber and the D.C. Taxicab Commission. It's a fight that would continue for years, round after round, but it's a fight the company would eventually win resoundingly. In D.C. and elsewhere, these triumphs have been widely attributed to a taxi-commission-crippling combination of vocal citizen armies (composed of riders and drivers), latent but intense resentment at the poor service provided by traditional taxis, sheer persistence, and of course boatloads of capital (at the time, Uber had already stacked up $50 million of the $16 billion it has raised so far).

 

Understanding the Uber Playbook-and Its Limitations

 

Uber's success gave birth to a new playbook in the Valley for startups where inconvenient regulation might pose an obstacle to growth. It went something like this: Develop a disruptive product or service, launch quickly without asking permission and before anyone knows what you're doing, use early success to stack up an obscene amount of capital, use that capital to blitz your way into new markets and quickly develop a massive army of loyal users, and use those armies to topple the walls of regulators, monopolies, and special interests.

 

It's true that Uber-particularly in their first few years-represents a perfect case study in regulatory hacking.

 

The problem is, much of Silicon Valley learned all the wrong lessons, simplifying the Uber story down to "if you stack up enough capital, you can steamroll government."

 

Not only is that a trite and offensive reduction, it's also wrong. While Uber did have the advantage of capital, they also adroitly applied many of the concepts and tools of regulatory hacking, which you'll read about in later chapters, to achieve incredible growth in the face of obvious regulatory obstacles.

 

Bradley Tusk, a political consultant and early Uber investor, puts it well: "From working with [Kalanick], I found that he is tough and he can be a pain, but in terms of what I saw firsthand for several years . . . he's the smartest client I've ever worked with in terms of understanding political dynamics."

 

Uber understood the nature of the entrenched power they were facing. They studied the power dynamics within the taxi industry and understood that they were a direct and unequivocal threat to major economic interests who had secured political protection in almost every city in America, since taxicab companies are invariably one of the top donors to local politicians. Given the iron triangles that had formed between taxi operators, taxi commissions, and city councils, it was always going to be nearly impossible to compromise with an industry built on the monopolistic restriction of supply by local governments. Uber had to fight. You'll learn about assessing the power dynamics in your market in Chapter 2: Power.

 

Facing this power dynamic, Uber rapidly and systematically tested various tactics for countering the inevitable blowback to their entry into a new market, first in Washington, D.C., and then in other markets. Uber was able to refine their playbook much faster than flat-footed taxi operators were able to develop a counterresponse. This makes sense when you understand that taxi operators are inherently local. They understand their market incredibly well but are not well organized nationally or internationally. Each time Uber entered a new city, they could test and strengthen their playbook; whereas each individual taxi commission was encountering the Uber threat for the first time. Uber doubled down on this advantage by recognizing that they needed to move with astonishing speed globally before the taxi commissions and operators could get their feet beneath them. In Chapter 3: Business Models and Chapter 4: Growth, you'll learn about finding a business model that will work and developing a growth plan for complex markets.

 

It's ironic, given how toxic the Uber brand has become over time, but it's hard to overstate how effective Uber was in their early days at creating a positive narrative. The Uber story could easily have been about an arrogant Silicon Valley startup coming into a new town and flagrantly violating laws-many of which were designed to protect consumers from legitimate risks-while undermining existing small business owners. Instead, Uber spoon-fed the media an endearing story about a scrappy upstart, with a service people loved, being squashed by "Big Taxi." They intuitively understood that most people in most cities ranked taxis on par with airlines, mobile carriers, and cable operators as industries they loved to hate, and played that to their advantage. You'll learn about storytelling in Chapter 6: Narrative and how to get that story out there in Chapter 12: The Media.

 

Uber's use of influential people to launch in a new city was effective at quickly getting to critical mass and had the added benefit of turning those influential people into fanatical advocates for their service. In other words, they were able to quickly gather real power within a new city, which they could cash in as soon as the taxi commissions tried to shut them down. You'll learn about how to systematically grow and use influence in Chapter 8: Influence and then how to apply it effectively in Chapter 14: The Grasstops.

 

Uber understood the rule book they were violating, so they knew how to present their influential advocates and the media with plausible explanations for how Uber was not in fact violating those rules (although that became much harder when Uber eventually expanded from limousines to regular cars with their UberX service, which clearly competed with taxi services). They also understood exactly how the rules needed to be changed to allow their business model to work legally so they could quickly suggest compromises to city councils inundated with calls and emails from their influential supporters. You'll learn about navigating policy incentives and barriers in Chapter 10: Selling to Citizens and Private Institutions.

 

Uber employed all the tactics of a grassroots campaign, creating a movement that turned their influential advocates into community organizers, and arming their addicted users, and even drivers, with the tools to pressure policymakers on their behalf. You'll learn about engaging citizens to help you fight your battles and grow in Chapter 13: Grassroots.

 

Finally, it goes without saying that Uber directly lobbied city governments for changes in laws and regulations, which you'll learn about in Chapter 15: Lobbying.

 

Why Uber Is an Imperfect Example

 

I've linked nearly every chapter in this book to something out of Uber's playbook. And yet, in many ways the Uber story represents an extreme outlier rather than a typical story of regulatory hacking.

 

How so? For one, people genuinely loathed taxis in most cities and had for years. Second, Uber provides a service that's easy for the average citizen to understand and try quickly-and citizens are willing to pay for it. Third, the taxi regulations that Uber was attacking are abstract in many cases and downright archaic in other, even if the motivations behind them were often legitimate. (I actually do want someone who drives people around full-time to have a more robust driver's license, vehicle inspection scheme, and level of insurance!) Fourth, taxi commissions are localized and fragmented whereas Uber was able to act globally.

 

Most regulatory hackers won't find themselves facing similarly favorable scenarios or power dynamics. For example, consider startups like Josephine that are trying to chip away at food safety regulations so that you can order dinner from a neighbor's kitchen, or 23andMe providing genetic testing without the involvement of a doctor. For many reasons, convincing regulators to rethink those kinds of regulations to make way for innovation is a far taller task than trying to snuff out local rules that require drivers to issue paper fare receipts, not digital ones. And even if citizens understand the issue, it's less clear that they will definitively side with innovation.

 

The bottom line is this: During those early years, Uber executed their strategy nearly flawlessly-but it was a strategy that was tailored to their company, their challenges, and their unique circumstances, not one that ought to be blindly applied to any other startup that's aiming to transform a complex market.

 

In fact, it's not even a strategy that worked for Uber beyond a point, starting long before the Travis Kalanick meltdown of 2017.

 

Over time, Uber lost control of their narrative. Part of this was inevitable as Uber ceased to be the scrappy upstart and almost overnight became a global colossus, which meant the Big Taxi versus Little Innovator narrative no longer worked. Part of it was numerous unforced errors on Uber's part, with Kalanick appearing arrogant and tone-deaf on one issue after another. When you're regulatory hacking, the public has to see you as operating in their interest, which Uber seemed to forget as their success grew. And some of the regulations that taxi operators faced really were in place for good reasons.

 

At the same time, the taxi commissions eventually developed their own playbooks and deployed more effective strategies to combat (or at least slow) the Uber takeover. And Uber kept pushing for greater advantage until local politicians eventually learned that, at the end of the day, voters may send a passionate email about Uber but don't actually donate or vote based on a candidate's record on the "Uber issue." Citizens cared but they didn't care that much. Uber's overreach caused them to be seen as having more bark than bite.

 

Uber won many battles, but it's much less clear whether they'll win the war they started with government. In 2015, Travis Kalanick could confidently proclaim that Uber had in fact used their boatloads of capital to steamroll governments around the world. But governments move at a different pace than startups. Declarations of victory by Travis Kalanick in 2015 probably feel decidedly premature to Dara Khosrowshahi in 2018.

 

This is all to say that Uber isn't so much the wrong example for those startups looking to learn the ins and outs of complex markets. It's merely a dangerous example, because it's one that has been lauded as the de facto playbook despite being grossly oversimplified, taking place amid extraordinarily unique circumstances, and with the ultimate outcome still in doubt.

 

As you'll see, taking the wrong lessons from Uber can be the difference between success and failure.