A startup’s playbook for regulatory hacking

Does government matter to entrepreneurs? Are regulations really a significant damper on new and exciting startups? According to some experts, government regulations are significantly less stringent than they may seem at first glance. One of these experts is Evan Burfield, a nationally recognized thought leader on innovation in entrepreneurship. Burfield was the founder of 1776, a prominent international business accelerator based in Washington D.C., and he’s now the CEO of Union, a new approach to connecting innovators with resources and growth opportunities. Burfield recently released a new book, Regulatory Hacking, in which he raises an interesting question: should entrepreneurs ignore government regulation, or embrace it?

ABERMAN: Regulatory hacking: what is it?

BURFIELD: Regulatory hacking is kind of a philosophy, a methodology, if you will, that’s really evolved out of a lot of the work that we did at 1776, and it really starts with the premise that most of the big opportunities for entrepreneurs, for investors. over the next twenty years. actually are going to come from new technologies being applied in incredibly regulated markets.

So, if you think about self driving cars, you think about blockchain and Bitcoin, you think about genomics, all these really incredible, powerful technologies, all of them are going to have their financial insurance come from markets aren’t just a little bit regulated, but extremely regulated. And I don’t think that the Silicon Valley playbook does a very good job at all of teaching entrepreneurs how you build high growth companies in that context. And that’s really what the book sets out to do.

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ABERMAN: In effect, my view of the Silicon Valley playbook is that it’s almost like the old joke about economists, you know, assume government doesn’t matter, assume regulation goes away, or blow it up. Which, you believe, I think, that’s a nonsensical viewpoint.

BURFIELD: Yeah, there’s sort of two approaches. One is, assume government doesn’t exist, or wait until you raise a lot of capital, and then maybe you go hire lobbyists to keep government out of your business. The other is, kind of, what I would describe the Uber playbook as. Which is hey, let’s get a technology out there really quickly, like car sharing. Let’s get a whole bunch of riders on board. Even if we might be violating laws or regulations, because by the time policymakers catch up, we’ll have amassed so much capital, and so many users, that we can just kind of roll government.

I actually tell this anecdote in the book, of sitting with a really prominent VC a few years ago in Silicon Valley, who just flat out said, I don’t understand why startups would need to think about government involvement, because Uber proved that if you stack up enough capital, government doesn’t matter. And I think that, A, is a horribly gross misreading of the strategy Uber actually applied, which was a lot more thoughtful and sophisticated than that, and number two: it hasn’t worked particularly well in almost any context other than Uber. You know, 23AndMe stacked up a lot of capital. But when you get a cease and desist letter from the FDA., you can’t just ignore it and fudge it later.

ABERMAN: Right, and Theranos ran afoul of fraud rules, even though it raised a lot of money. You know, it’s funny, Evan, it strikes me that when I have this conversation as well, you and I are very much aligned in this view, people’s hackles will get up. Talking about regulation becomes a partisan discussion really quickly, but you don’t see it that way, do you?

BURFIELD: I don’t. A really central idea in the book is that this isn’t about the U.S., this is not
about conservative versus liberal, this is relevant, this methodology, this approach, this kind of innovation, is relevant to almost any political system in the world. Every government in the world that is functioning, regulates things that matter and are risky to their citizens. There is no government that doesn’t put in place traffic rules. There is no government that does not put in place things to protect food supply. Because governments that don’t, don’t last very long.

ABERMAN: It’s just a question of degree, in other words.

BURFIELD: Exactly. And so, if you’re an entrepreneur, and you want to apply amazing new technologies to transform food supply, you can’t simply wave away the reality of regulation, you have to understand it. You have to engage with it. If you want to create cars that drive themselves, there is no government in the world that is going to go, hey, that’s awesome, just put them out there and we’ll see what happens! And even if you were, you still have to deal with the effective regulation that insurance companies, and liability, and legal structures impose, right? So, given that almost all of the really big opportunities for innovation are in these regulated sectors, entrepreneurs and investors just should get smart about this stuff.

ABERMAN: So, when you hone it down, regulatory hacking, it’s sort of like, we do lean startup methodology to do rapid customer discovery. It sounds to me what you’re saying is, when you’re finding out who your initial customer is, you should also be figuring out what the regulatory impediments or opportunities are.

BURFIELD: Yeah, we talk about that a lot, actually. This book isn’t a repudiation of lean principles at all. It’s an application of lean startup principles to these very complex markets. And, the way lean often gets applied says, hey, you need to be obsessive about your customer, you need to understand everything about your customer. But take, for example, transforming clinical workflows in healthcare. Who’s your customer? The beneficiary may be a patient, the user, in one sense, might be a nurse. The user in another sense, meaning they’re taking advantage of data this deploys, is a doctor. A hospital administrator is the actual buyer, but the payer is the government or an insurance company. And oh, by the way, you might have to get some regulations changed or reinterpreted. And so, you have to make sure it adds value to whoever the regulator is.

So, who’s your customer? We have to add value to a whole range of stakeholders, or your solution simply doesn’t work as a business. And that actual reality holds true in situation after situation: healthcare, transportation, security, financial services, so many of these markets. And so, instead of being obsessive about your customer, you need to be obsessive about the full power map you’re confronting. Who’s everybody who cares, everybody who has to be aligned, who influences them, what do they want, what are their motivations, what are their capabilities? And once you get that right, you have to flow from there into your business model, your growth strategy, how you really build your business.

ABERMAN: In some ways, it’s analogous to social venturing, where you have to be aware of the donors, for example. Evan, last thing before I let you go: this seems to me to be the answer to a question that many people have asked, which is, what could be distinctive about D.C.-based entrepreneurship?

BURFIELD: Yeah, absolutely. You and I have been having a dialogue about this for seven years now, and I think it’s only more true today. What’s great is, five years ago, the idea that D.C. should focus on markets in which regulation is central, still felt like a niche thing. Today, honestly, I think if you look at where the frontier of startup innovation and venture capital is, globally, it’s in these sectors, and D.C. should be a place that can be a world leader, and dominant, in these areas.

ABERMAN: Evan, I really appreciate you coming on the show, and good luck with regulatory hacking. I think it’s a book that a lot of us should read. Thanks for taking the time.

BURFIELD: Thank you.