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Review: Why Start-Ups Need a Regulatory Strategy to Succeed

Category: Business,Finance

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Market leaders never tire of describing the sources of their competitive advantage. Scale, customer loyalty and proprietary know-how are the most often discussed. Much less commented upon are the substantial benefits that established businesses obtain from the government.

This oversight, according to two new books, leads entrepreneurs — particularly in the technology arena — to frequently underestimate the importance of integrating regulatory strategies when starting a business.

Nothing is more likely to get the attention of even the most complacent company with a dominant market position than a new business model seeking to overturn its simple but profitable existence. And as both “The Fixer: My Adventures Saving Startups From Death by Politics” and “Regulatory Hacking: A Playbook for Startups” point out, these powerful incumbents have significant regulatory tools at their disposal to shield their commercial vulnerabilities.

Given the incessant whining about burdensome regulation by big business, it may come as a surprise that the government is so often a source of protection from unwanted competition. The most obvious circumstance is when an entire business model relies on scarce government licenses or exclusive government contracts.

The author of “The Fixer” directed the intense regulatory battles for Uber, FanDuel, Lemonade and others.CreditPenguin Random House

“Regulatory capture,” by contrast, refers to when the dominant industry is able to sway an agency to protect its interests over those of the public. Such regulation can result from blatant quid pro quo influence peddling or simply be the outcome of underfunded bureaucrats overwhelmed by the resources and expertise of industry. Less blatant, but no less powerful, is when the fixed costs imposed by even well-intentioned baseline regulatory requirements preclude any but the largest players from operating profitably.

“The Fixer” has a surprisingly stream-of-consciousness feel, given how organized and disciplined its author, Bradley Tusk, must have been to successfully direct the intense regulatory battles for Uber, FanDuel, Lemonade and others.

Most of the first 100 pages are a professional memoir of his years working in political campaigns and in government. This is followed by a few case studies from Mr. Tusk’s consulting businesses targeting early-stage companies facing political obstacles.

The book ends with a description of his philanthropic efforts to allow mobile voting, a dozen pages of bullet-point observations as a “quick guide to start-up politics” and finally a brief update on the various famous people and companies mentioned in the book.

In stark contrast, “Regulatory Hacking,” by Evan Burfield (with J. D. Harrison), is chock-full of checklists, matrices, diagrams and jargon all of uneven usefulness. Although the focus is on an ill-defined subset of start-ups that target “complex markets that are deeply intertwined with the government because they meaningfully impact the public interest,” Mr. Burfield appears to be trying to produce a guide for start-ups generally and covers everything from business models to sales strategies.

Stylistic considerations aside, Mr. Tusk and Mr. Burfield have fundamentally opposing perspectives on how to approach regulatory obstacles facing new businesses.

“Regulatory Hacking” covers everything from business models to sales strategies.CreditPenguin Random House

For Mr. Tusk, “our collective future” depends on helping start-ups disrupt traditional industries and escape “the clutches of big, scared, old companies terrified of competition.” He often glosses over the substantive public policy debates underlying the specific regulatory battles to emphasize the raw political and economic interests involved. Such is Mr. Tusk’s love of hand-to-hand combat that he even questions whether forming industry alliances is worth the trouble: Better to die because you “fought hard and lost” than because your coalition couldn’t get its act together.

Uber’s dramatic early political victory in New York City, which opens “The Fixer” and epitomizes its take-no-prisoners approach, is treated by “Regulatory Hackers” as the exception that proves the rule. If Mr. Tusk’s theme song could be “Fight the Power,” Mr. Burfield’s is closer to “Kumbaya.” For Mr. Burfield, “solving important problems for citizens will involve collaborating with government far more often than open conflict.”

In place of Uber, Mr. Burfield designates Elon Musk as the “ultimate regulatory hacker.” By establishing “a personal brand as someone who may very well be able to save mankind from itself,” Mr. Musk has facilitated his ability “to work with — not around — governments” and avoid the need for direct confrontation.

Separate from the question of whether the extraordinary Mr. Musk is a practical role model for the average entrepreneur, the brief time since these books were submitted for publication has not been kind to either’s choice as the exemplar of the optimal approach to regulatory challenges.

Mr. Tusk’s pride in Uber’s humiliation of Mayor Bill de Blasio — whose motivations he does not characterize as corrupt only because it “would be an insult to the corrupt” — is no longer justified given that New York became the first city in the nation last month to impose a cap on new licenses for ride-sharing services. And the disdain that the superhuman Mr. Musk has recently evinced for mere mortal investors — first by disparaging their legitimate questions and then by ignoring the securities laws designed to protect them — has exposed the inherent weakness of strategies reliant on celebrity brands.

Disruptive start-ups do need to anticipate the regulatory reaction of the vested interests they threaten. In different ways, both of these books — “The Fixer,” lively and entertaining if idiosyncratic, and“Regulatory Hacking,” more exhaustive but exhausting — serve as a useful reminder of this reality.

For those tenacious enough to persevere and disrupt the status quo, however, premature celebration should be avoided at all costs. Your success almost certainly will make it easier for the next wave of insurgents. And when they come, you will find yourself playing an unfamiliar role: the incumbent.

Jonathan A. Knee is Professor of Professional Practice at Columbia Business School and a Senior Advisor at Evercore. His latest book is “Class Clowns: How the Smartest Investors Lost Billions in Education.”

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