Why you should join a coordinated startup

Any startup in a regulated market will carry some risk. The potential payoff at the right company could be worth it. For years, investors have shared a standard piece of advice for founders looking to build in regulated markets. Don’t take on the regulatory risk, and don’t put your startup at the mercy of political whims. Don’t grow fast in a market where regulators will need your drift. Now that attitude is changing. In a recent talk at Columbia University, entrepreneur Steve Blank, along with Bradley Tusk, Uber’s first head of policy, and Evan Burfield, author of Regulatory Hacking, discussed how some most exciting unicorns of the last ten years have been launched in heavily regulated markets and why they think the trend will speed up, why regulated markets are a massive opportunity. When you look at ultra high-performing tech companies, most are in markets where regulators are absent. That’s not an accident. As Burfield explains, we’ve come through 20 years of the internet exploding in the economy, where you could pick off lightly regulated slices of the economy, like media and retail. But you keep going if you’re an entrepreneur. You keep looking for the next puzzle to solve, and then you’re getting into healthcare, transportation, energy, defense. When the internet first emerged as a disrupting force, the lowest-hanging fruits for entrepreneurs were unregulated markets. Decades later, the new frontier of untapped opportunity lies in sectors with heavy regulation.

Why you should join a coordinated startup

Any startup in a regulated market will carry some risk. The potential payoff at the right company could be worth it. For years, investors have shared a standard piece of advice for founders looking to build in regulated markets. Don’t take on the regulatory risk, and don’t put your startup at the mercy of political whims. Don’t grow fast in a market where regulators will need your drift. Now that attitude is changing. In a recent talk at Columbia University, entrepreneur Steve Blank, along with Bradley Tusk, Uber’s first head of policy, and Evan Burfield, author of Regulatory Hacking, discussed how some most exciting unicorns of the last ten years have been launched in heavily regulated markets and why they think the trend will speed up, why regulated markets are a massive opportunity. When you look at ultra high-performing tech companies, most are in markets where regulators are absent. That’s not an accident. As Burfield explains, we’ve come through 20 years of the internet exploding in the economy, where you could pick off lightly regulated slices of the economy, like media and retail. But you keep going if you’re an entrepreneur. You keep looking for the next puzzle to solve, and then you’re getting into healthcare, transportation, energy, defense. When the internet first emerged as a disrupting force, the lowest-hanging fruits for entrepreneurs were unregulated markets. Decades later, the new frontier of untapped opportunity lies in sectors with heavy regulation. 

Looking at the ten largest rounds, companies in regulated industries raised eight. Katerra, a startup disrupting the construction industry, raised an $865 million Series D. Zoox, an autonomous driving startup, raised a $500 million Series B. Samumed, a medical startup working on tissue regeneration, raised a $435 million Series A. Robinhood, a zero-commission investing platform, raised a $363 million Series D. Lime, an electric scooter rental startup, raised a $335 million Series C. Devoted Health, an insurance startup, raised a $300 million Series B. Bird, another electric scooter rental startup, raised a $300 million Series C. Grail, a cancer screening startup, raised a $300 million Series C. The trend is clear. If you’re looking to join an earlier stage company where your equity might equate to a massive exit, you should be looking at companies in regulated markets. The difficulty, but, becomes choosing a regulated startup that will survive. How to pick a startup in a regulated market, Paul Graham defines a startup as a company designed to grow fast, and so much of the startup lexicon reflects this. From Facebook’s brilliant move fast and break things motto, to the Lean Startup method’s emphasis on iterating quickly and cheaply, most standard startup wisdom heavily emphasizes speed. Regulated markets, but are an original game. As Burfield warns, in regulated markets, the rules that apply for low-friction or permission-fewer spaces can lead you in precisely the wrong direction. If you move fast and break things in the financial sector, the SEC can throw you in jail. When you’re considering joining a startup in a regulated market, you need to ask all the questions you would ask any startup before entering, and these two. 

First, are the investors or leaders experienced with the regulators? Regulation is about relationships and leverage. Having a relationship with an advantage over regulators enables a startup to navigate controls. An exceptional example of this, as pointed by Blank, is the Defense Innovation Unit. The DIU is a Department of Defense’s fund for investing in startups that build defense technologies. If the U.S. government is invested in a startup, you can assume it will have an easier time with regulators. Having a relationship with regulators helps when a startup is forced to fight. Uber initially hired the Tusk as its first head of policy when it was clashing with the New York City Council about Uber’s right to operate in the city. Tusk, who’d made a career in New York politics working for Chuck Schumer and Michael Bloomberg, was experienced with these regulators. He leveraged his knowledge of NYC politics and Uber’s massive user base, in what he gleefully described as a vicious dirty campaign to flip the city council and halt regulation blocking Uber. If investors, founders, or leaders at a startup have experience with the regulators controlling their market, they have a better chance of surviving. Second, am I an expert in this field? How much you know about the area dictates how early of a company you can join. 

Not coincidentally, regulation happens in markets where there is a significant risk posed to the consumer. The worst digital analytics platform is unlikely to harm a user. The worst self-driving car could be a death trap. Vetting whether a startup satisfies its burden of proof for demonstrating its product’s safety, which Burfield mentions is one of the biggest hurdles to startups in regulated markets, requires an expert. Mature companies operating in the market are significantly derisked from this perspective, as they’ve passed some regulatory scrutiny level. Earlier stage companies, but have not been derisked, and if you’re not an expert in the field, you’re not qualified to determine whether the startup will survive. The playbook for regulation is never the same. One of the tricky parts of prescribing advice within regulated markets is every startup needs a different playbook. Different markets will have different entrenched interests, and the nature of the regulatory regimes and the mechanisms by which they regulate will vary. For example, Uber’s strategy of running ads that directly attacked council members were tied in with mobilizing users to put pressure on their local governments. This worked because local politicians needed those users to vote. Airbnb can’t use this strategy–Airbnb guests, by definition, are using the service in locations where they don’t live. As a result, the framework for picking a regulated startup to join is less about looking for a startup with a particular strategy. More about looking for a startup is as derisked as possible. While any startup in a regulated market will carry some regulatory risk, the potential payoff at the right company is worth it.