What Is Regulatory Hacking?

When I wrote my book “Regulatory Hacking: A Playbook for Startups” in 2018 — I grappled with using the term hacking in the title. To those unfamiliar with its origins, hacking can have a negative connotation.

It usually elicits thoughts of secretive, expert knowledge used to gain unfair access to something. This stereotype has appeared in too many bad movies and TV shows – someone hunched over a computer in a darkened room wreaking havoc on mankind.  

To understand the true essence of hacking, you need to go back to its origins. Hacking is about using creativity, expert knowledge, and experimentation to create something much faster than a non-hacker (if the non-hacker was even able to do it at all).  In this sense, every smart startup would do better by employing one or two hackers over a team of “regular” engineers.

The Origins of Hacking (Engineering)

Hacker culture started in the 1960’s among hobbyists at MIT who wanted to make software do things never before possible. The culture was based on sharing — once you found a hack (discovery that helped you do something new) you shared it with the community.

Silicon Valley took hacker culture and evolved it into a set of formal methods and tools. Groundbreaking books like “Hackers & Painters: Big Ideas from the Computer Age,” “The Lean Startup,” and “The Startup Owner’s Manual” are now required reading for any founder looking to successfully scale a company.

The winning Silicon Valley formula for hacks goes something like this: Gain a deep understanding of your customer, release of a minimally viable product, gather customer feedback, analyze, iterate, and repeat, repeat, repeat.

Growth Hacking (Engineering + Marketing)

In 2010, hacking moved beyond engineering and technology when entrepreneur, angel investor, and startup advisor Sean Ellis coined the term: growth hacking.

Growth hacking is a marketing technique that uses data, automation and viral mechanics to drive revenue, increase product adoption and secure new customers.

For startups, this alternative to traditional marketing efforts focuses on accelerating growth at a low cost.

Just like hacking in general, growth hacking can be misunderstood. In some instances, it was used solely to wow investors and secure another round of funding. Built upon unscalable marketing techniques – the end result was inflated customer numbers and high churn rates.

Sean’s work with Dropbox is the perfect use case for growth hacking done right. The online storage company grew its footprint quickly by incentivizing existing users to refer their friends (to receive additional free storage on the site). This word of mouth meets viral marketing program gave Dropbox a huge return on investment.

Regulatory Hacking (Engineering + Marketing + Public Affairs)

Today’s startups are tackling important problems like the energy crisis, fixing transportation infrastructure and eradicating disease – to be successful founders need to navigate in complex markets and effectively change  the regulations that are keeping the world the way it is.

Regulatory Hacking sits at the intersection of startup disruption and public policy. When done correctly — it is hacking in the public interest and for the public good. It produces win-win outcomes for citizens, policymakers, and business leaders.

Like its predecessors – regulatory hacking has the potential to be misinterpreted and done incorrectly. It is not a way to cut through red tape (or worse circumvent the law). It is about stretching and bending…not cutting and breaking. Regulatory hacking is a process not a one-size-fits-all strategy. A brilliant hack for one regulated startup might be a disaster for another in a slightly different context. For most regulatory hackers, solving important problems for citizens involves collaborating with government far more often than fighting with it.

HopSkipDrive is great example of how regulatory hacking can transform an industry. This transportation network company provides service to kids with operations in 6 metropolitan areas in the United States.

Founders Janelle McGlothin, Joanna McFarland, and Carolyn Yashari Becher instinctively understood that ride-sharing for kids wasn’t simply a minor tweak to ride-sharing for adults. They thoughtfully and methodically crafted their approach to regulation and used collaboration and trust to refine their own playbook.

I’ll be sharing their story in a future blog post – so stay tuned.

Innovation Has No Borders

At 1776…

When we think of Iraq, we think of Rebeen Pasha, an American citizen who came to the United States in the 1990s as a refugee escaping Saddam Hussein.

Rebeen Pasha from Iraq

Rebeen graduated from the University of Virginia and the University of North Carolina at Chapel Hill. He was a senior advisor to the United States Agency for International Development before going back to Iraq and rolling up his sleeves to launch the MyeDream incubator in Irbil in the Kurdistan Region. MyeDream is a 1776 partner and is building an ecosystem that helps inspired young people in Iraq to realize their entrepreneurial dreams.

When we think of Iran, we think of Faty Amir Soleimani, the founder of Koodakoo and a competitor in the Challenge Cup 2016.

Faty Amir Soleimani from Iran

Faty received her master’s of business administration (MBA) from Columbia University in New York City before returning to Tehran to launch Koodakoo, which is a mix of BabyCenter.com and Diapers.com for parents in Iran.

When we think of Libya, we think of Abubaker Zarrug, the founder of Floos-e, another Challenge Cup 2016 startup competitor giving consumers in Libya access to mobile payments and banking.

Abubaker Zarrug from Libya

In Abubaker’s own words,

“In my country, the banking system is very undeveloped. So, our company helps customers to pay through their mobile phones wherever they are instead of paying in cash.”

When we think of Iraq, Iran, Libya, Syria, Sudan, Somalia, and Yemen, we think of our colleagues, our startups, and our partners who work hard every day to solve tough problems to make people’s lives better.

At 1776, we do not judge people based on their religion, nationality, gender, sexual orientation, or race. We support and work with them based on the potential of their ideas, their passion in overcoming obstacles, and their capacity to innovate in the face of chaos. We are as excited to help a founder in American city Boise, Idaho transform agriculture as we are to help a founder from Aleppo, Syria to improve education for children.

At 1776, we are a global community, and we stand together.

A startup competitor showcases his product to a judge at the Challenge Cup 2016 event in Dubai, which brought together top startups from across the MENA region.

100,000 Miles to Find, Fund, & Grow the Best Startups

A wild idea less than three years ago now spans more than 50 cities worldwide to find, fund, & grow the best startups.

Two years ago, most big pitch competitions seemed to be all about finding the next great Silicon Valley idea, whether it was having your laundry done for you or sharing a snarky secret about someone. The pitch competitions then were neither global nor uncovering particularly inspiring ideas.

We wanted to shake up the startup world. So, we launched Challenge Cup to find the most impactful startups around the globe and create valuable experiences for them.

Since then, Challenge Cup has been to over 100 cities worldwide. No wonder people thought we were crazy when just four months after launching the first 1776 campus, we announced the pitch tournament and our international incubator network, Startup Federation.

Although people thought we were absolutely insane, from 1776’s perspective, the Startup Federation and Challenge Cup were the most obvious next steps after we launched. While our headquarters is in Washington, D.C., the startups we want to find, fund, and grow are not just at home but everywhere.

The mission of 1776 is to change the world for the better through enabling innovative startups in industries that matter: education, energy, sustainability, health, transportation and cities, among others. The vision has always been a global revolution. So, we decided to forge ahead and make Challenge Cup a reality.

Now, as Challenge Cup is in its third year, let’s take a look back and then a look ahead. What have we learned through our journey? Are we finding big startup ideas or just inspiring stories? How have we evolved the Challenge Cup to get closer and closer to finding the best startups that are tackling our world’s biggest challenges, wherever those startups happen to come from?

Challenge Cup 2014

Inspirational stories or smart investments?

The first year was an experiment with a splash of fake-it-until-you-make-it. We traveled to 16 cities around the world — eight in the U.S. and eight abroad. In each city, we engaged a Startup Federation partner to host a two-day boot camp for invited local startups operating in education, energy, health, and smart cities. On the final evening, we hosted a competition and identified the best startup in each industry in that city.

Once we completed all sixteen cities, we brought the 64 winners back to Washington, D.C. for a global competition that would serve as the centerpiece of the Challenge Festival, a week long program full of events, receptions, and other fun. As a cherry on top, the prizes for the global winners would be investments from a venture fund that we were raising.

That first Challenge Festival was incredible. Bringing together 64 startups from around the world, making them the rock stars of a festival, and having them compete against each other was awesome.

Washington, D.C. responded to the Challenge Festival with unbridled excitement. Each event drew a larger crowd than the last, culminating in a packed house for the final competition at the U.S. Institute for Peace, looking out over the Lincoln Memorial. All told, we had more than 6,000 people attend at least one event during that first Challenge Festival in June 2014.

The overall winner of Challenge Cup 2014 was HandUp from San Francisco, along with seven other inspiring startups that finished first or second in each category: EduCanon, Lingau.ly, CancerIQ, MediSafe,Water Lens, Mellowcabs, and PlugSurfing.

Some of the Challenge Cup 2014 winners celebrate on stage together.

One of the interesting questions from that first Challenge Cup though was whether the competitors were merely inspiring stories or would in fact prove to be strong potential investments. For 1776, the question was not purely academic; we were actually putting our limited partners’ money behind 1776’s belief that you could find amazing, successful startups tackling big problems anywhere in the world.

More than two years have passed since then, and we have a lot more data to assess how that class of winners is performing.

In the inaugural Challenge Cup, 1776 had more than 600 startups apply to participate. We chose 368 to compete. From those 368 competitors, 64 came to the Challenge Festival. So far, 33 of the 64 global finalists have raised seed capital, totaling a staggering $33,567,030 in seed capital raised to date.

Many of the global finalists raised significant seed rounds shortly before or after the Challenge Festival in June 2014, while others continued working on their businesses before finally raising significant seed rounds 12 or 18 months later.

The Series A venture rounds raised by Challenge Cup 2014 finalists also serve as testimony to their momentum. Of the 33 startups who raised significant seed rounds, 14 have gone on to raise a total of more than $60 million in Series A capital. While 12 of those startups are U.S.-based, one is in Tel Aviv, and one is in Beijing.

Finally, two of the Challenge Cup 2014 global finalists have been acquired. Daimler acquired RideScout less than six months after the Challenge Festival while Renaissance Learning acquired UClass within a year.

Challenge Cup 2015

Another trip around the globe for even bigger returns

After the success of the first Challenge Cup, we took what we learned to improve the second annual Challenge Cup. Again, 1776 traveled to 16 cities but went to fewer U.S. cities than the year before to highlight the international focus of the competition.

We also broadened some of our industry categories: energy evolved into energy and sustainability, and smart cities grew into transportation and cities. Otherwise, the formula for Challenge Cup 2015 looked the same as that of 2014, and 1776 set off on another world tour.

The results for Challenge Cup 2015 were even stronger than the year before. Challenge Cup 2015 saw more than 1,000 startups apply to participate, an increase of more than 65% from the previous year. We chose 451 to compete. Of the 451 competitors, 1776 hosted 80 for the global finals at the Challenge Festival, as we added 16 wildcard spots to the 64 winners from the 16 cities.

The winner of Challenge Cup 2015 was Twiga Foods, an m-commerce startup from Nairobi that’s working to make food supply chains in Africa radically more efficient. The other winning startups were LearnLux, Cognotion, Handsfree Learning, Radiator Labs, BaseTrace, Unima, ReliefWatch, and EverCharge.

The Challenge Cup 2014 winner presents the prize trophy for the Challenge Cup 2015 winner.

Since Challenge Cup 2015, 35 of the 80 global finalists have each raised seed capital, totaling $20,796,000, so far. Similar to the year before, many of the global finalist startups are still raising seed capital.

As Challenge Cup 2015 is more recent, the global finalists are just starting to raise Series A capital. Of the 35 who have raised significant seed capital, two have raised Series A financing, totaling $5.2 million. One of those startups is based in New York City, U.S. and the other in Dublin, Ireland.

Challenge Cup 2014 and Challenge Cup 2015 followed essentially the same script, but something kept gnawing at us. While 16 cities felt like an awful lot of travel for those of us wandering the world on red eye flights, 1776 was still only seeing a small fraction of the most impactful, promising startups across the globe.

Then, the question for Challenge Cup 2016 was: how can 1776 really unearth the best of the best from the whole world, or as much of it was we could reasonably hope to cover with finite resources?

Challenge Cup 2016

Expanding global reach, industry categories, and potential for prizes

The 1776 team arranged for incubator and entrepreneurial partners in over 50 cities worldwide to produce their own Challenge Cup Local competitions. For each of the 50-plus cities, 1776 provided the scripts and promotional support and is now flying the Local winners to compete at nine Challenge Cup Regional programs. Each of the Regional programs look more like mini Challenge Festivals than our previous city competitions and include additional programming and valuable meetings for competitors instead of the original pop-up boot camps.

Beyond open sourcing Challenge Cup 2016, we also expanded the industry categories again. We’ve added security, money, and food on top of education, health, energy, transportation, and cities. With more categories, we simplified the judging process. The Challenge Cup Local judges pick the best startups competing — regardless of sector — rather than identifying a winner in each category. At the end of the day, we want to find the most promising startups, regardless of industry.

The results from the Local round have been fascinating and inspiring. We accomplished 1776’s goal of significantly broadening Challenge Cup’s reach around the world. Based on current trends, 1776 expects to have more than 3,000 startups apply to compete in Challenge Cup 2016 (up from over 1,000 in 2015) and will have more than 1,500 participate (up from 451 in 2015).

The fascinating part wasn’t that we got more cities involved. What is fascinating is that our Startup Federation partners around the world have truly taken ownership of the Local programs. We created Slack channels for the Local organizers to ask questions, share ideas, and solicit feedback from each other and 1776.

Beyond anything we could have foreseen, the Local organizers have challenged each other, each city actively trying to out-do the ones before, with banter flowing in from different time zones around the world. We have had the privilege of watching a real global community of startup organizers form organically.

The first hint we saw of the global community that would come to be was from Challenge Cup Local Montreal, the very first city of Challenge Cup 2016. Notman House — 1776’s partners in Montreal — produced a great program, and the pictures they posted from it were unreal…

Challenge Cup Local Montreal took place in a refurbished cathedral!

YES Philippines, 1776’s partners hosting Challenge Cup Local Manila, took the production to a new level. The organizers printed giant boarding passes for their winners to represent their trips to compete at Challenge Cup Regional Tokyo. YES Philippines shared those pictures with everyone on Slack, and many Local events since then have imitated and furthered that idea.

The YES Philippines boarding-pass awards have become a phenomenon.

The 1776 Challenge Cup hosts have also taken creative licenses with the content we provide them. Many of the organizers have localized the template website images, Facebook pages, videos, and signage, all of which is meant to introduce Challenge Cup, cover pitch coaching, and more, for their own audiences.

One of our favorite mashups so far came from our friends in Harare at iZone Hub, which gave 1776’s images a uniquely Zimbabwean spin.

iZone Hub localized 1776 materials to fit Harare.

As the Challenge Cup Local round gives way to the Challenge Cup Regional round, additional startup hubs in new cities continue to reach out to host their own Challenge Cup Local programs. Thinking about just how much of the world Challenge Cup 2017 will cover is amazing.

After two Challenge Festivals worth of experience, 1776 further improved the prize structure. Previously, the prizes were $650,000 in investments from 1776’s fund, spread across eight winners. However, we found the original prize structure presented a few challenges.

Primarily, in each of the first two years, there were incredible startups that deserved to win but weren’t necessarily fit or at least for 1776’s fund. We want to avoid tensions between between rewarding awesome startups and meeting fiduciary responsibilities to our limited partners.

Furthermore, completing detailed due diligence on an investment within the structure of a broad global competition is impractical. The prize has always been contingent upon full due diligence, which can feel like a letdown to winners inexperienced in the due diligence process.

Therefore, Challenge Cup 2016 is giving $175,000 in no-strings-attached cash grants to the global winners. Additionally, 1776 has allocated $1 million from its fund to invest in global finalists. The new prize structure will give us the flexibility to reward the best startups tackling our world’s most important challenges while also funding the startups with the most promising investment opportunities. In some cases, startups might fall into both of those prize categories.

A truly wild idea less than three years ago exploded into a program that now spans more than 50 cities and supports startups that have raised more than $120 million in capital to date. Through Challenge Cup, we get to watch startups from Boise to Bangalore working on innovation that matters.

1776’s cofounder and Co-CEO, Donna Harris, is getting ready to start the Regional round at Challenge Cup Regional Mexico City on Jan. 14 before I head to the west coast for Challenge Cup Regional San Francisco. Hopefully, we’ll see you in San Francisco, New York, Dubai, Tokyo, Nairobi, Singapore, London, or Tel Aviv!

 

Why Scientists Trump Engineers, or What the Hell Is a Lean Startup Anyway

Within the pantheon of startup buzzwords, there is perhaps no term more dominant than lean startup. It is almost impossible to find a credible startup anywhere in the world that doesn’t describe themselves as lean. I know. I’ve tried. Not only do entrepreneurs use the term lean but they delight in throwing around the jargon of lean startups — words like iterate, product market fit, and the always popular pivot. Lean has even penetrated the corporate world and government. GE is making the lean methodology required reading for aspiring executives. The White House has created a swat team of lean development experts with 18F.

Despite all of this excitement, the only thing greater than the buzz about lean startups is the level of confusion around what lean thinking actually involves. This is unfortunate because understanding lean really is incredibly important for the success of startup founders.

So what is the lean startup methodology? Let’s start with the text book definitions. 

According to www.theleanstartup.com:

The Lean Startup provides a scientific approach to creating and managing startups and get a desired product to customers’ hands faster. The Lean Startup method teaches you how to drive a startup-how to steer, when to turn, and when to persevere-and grow a business with maximum acceleration. It is a principled approach to new product development.

Hmm. It sounds kind of like defensive driving. Let’s check out Wikipedia:

Lean startup is a method for developing businesses and products… [that] shortens their product development cycles by adopting a combination of business-hypothesis-driven experimentation, iterative product releases, and… “validated learning“.

What does this actually mean? It’s defining buzzwords with even more buzzwords. The unfortunate thing is that there are some really crucial insights buried in the jargon. It’s with this in mind that I take my own stab at explaining this idea for entrepreneurs and investors–and institutions who want to work with them.

The essential truth of the lean startup methodology is simple: it’s better to be a scientist than an engineer.

When most first time entrepreneurs sit down to build a company, they instinctively think of entrepreneurship as an engineering challenge. They have a problem that they want to solve and a vision for what the solution looks like. They sit down and draw out the blueprints for that solution and how they’ll turn it into a business. Those blueprints are traditionally referred to as a business plan. They take their business plan and break down all of the work necessary to execute on it. Whether on paper or merely in their heads, they end up with a giant project plan with all the steps and critical paths necessary to get them to a magical milestone: launching their business.

This approach is seductive for a number of reasons. First, it’s easy to understand because it’s linear. You simply have to work incredibly hard moving from one step to another with success waiting just after that magical launch moment. Second, it provides regular reassurance of progress as you tick tasks off the list. You can tell yourself that you’re X% of the way to success based on your project plan. Third, it tempts founders into the dangerous hubris of thinking that they are visionaries, rather than cultivating the ability to listen intensely to customers.

There is one crippling problem with the engineering approach: the odds are pretty close to 0% that the blueprint that you’re building toward is right — and in fact it’s probably very wrong. As a founder, if you lack the humility to recognize this from the beginning then no amount of reading blogs about lean startups will help you.

Rather than thinking of yourself as an engineer, you should think of yourself as a scientist. You need to be incredibly passionate about the problem that you’re solving but incredibly humble about discovering a scalable business model and product that solves it.

Scientists start with hypotheses that they test through experimentation with the real world. Lean founders start with business model canvases that they test through experimentation with actual customers.

Scientists ensure that each experiment is falsifiable, meaning that a successful test is often one that proves the hypothesis wrong. Lean founders do the same thing — with the goal of quickly eliminating possible approaches rather than justifying their preconceived ideas.

Scientists construct the simplest experiments that allow them to test their hypotheses. Lean founders build minimum viable products or features — often simply a landing page to test a particular message or customer acquisition strategy — rather than rushing to build any feature or infrastructure unnecessary to the immediate goal of finding a scalable business model.

In short, the lean startup methodology is simply the scientific method applied to discovering scalable business models. Once you really internalize that truth and why it’s important, the rest of the jargon and buzzwords suddenly make a whole lot more intuitive sense.

Of course being a scientist is a famously lonely and frustrating pursuit. So it is with being a lean founder. Approaching your startup as an engineer feels good, right up until you crash into a massive wall of failure. Approaching it as a scientist feels like a little bit of failure every day. If you have faith in the process though, each of those failures is moving you closer to building something truly extraordinary. The persistence required to fail a little bit each day in pursuit of a much greater good is rare though. Managing your emotions, staying focused, and really listening to what the customer data is telling you is what separates great founders from ones parroting what they hear on TechCrunch.

Regulatory Hacks

Does the startup world need to develop a whole new kind of hack? The answer is yes: regulatory hacks.

Just asking this question feels a bit irritating — like something from the next season of Silicon Valley. Startups are already bursting with buzzy jargon. Lean, pivots, seed rounds, elevator pitches… the list is numbing. But startups are beginning to see huge opportunities in highly regulated industries and that requires evolving a new method of problem solving.

Before I make my case for why regulatory hacking needs to be a thing, please indulge me in a quick history of the idea of hacks.

Hacking in general is pretty tough to define. Used negatively, it implies using secretive, expert knowledge to gain unfair access to something, as in hacking into someone’s account. Used positively, it implies using creativity, expert knowledge, and experimentation to create something much faster than a non-hacker — if they could do it at all. In this sense, every smart startup would rather have one or two hackers over scores of “regular” engineers.

Extending this idea, growth hacking applies a hacker mindset to acquiring users or customers. In the best sense, growth hacking implies creative experimentation with a variety of channels and techniques — all to accelerate customer acquisition. Growth hacking is particularly important for business models with strong network effects where getting to critical mass is, well, critical. For example, Whitney Wolfe used networks of sororities across America to quickly build a critical mass of women on Tinder. The growth hack for Tinder was to think creatively about where to find lots of young, single women at one time and how to efficiently reach them. (she also used frats and played them off each other because sororities were looking for fraternity guys and frat guys were looking for sorority girls. Obvious controversy here with her suing the company, so tread lightly)

Just like hacking in general can be controversial, so to can growth hacking. In some cases, growth hacking can imply numbers inflated by marketing techniques that won’t scale — often to build momentum for another round of funding from investors. In other cases, growth hacking can imply the use of techniques that invade privacy, spam people, or trick people. Regardless of whether it’s used for good or evil, growth hacking is usually applied successfully in consumer or SaaS businesses where the best product — marketed effectively and efficiently — will win customers. This faith in the power of free markets is central to the ideology of Silicon Valley. Hacking — whether products or growth — is merely another form of the idea that the smartest person with the best solution will win.

Back to my original question: What happens when the best solution cannot win? Many of the sectors most ripe for disruption today — education, healthcare, energy, transportation, agriculture, financial services, and more — all suffer from the reality that the public sector has major influence in picking winners. In some cases, this is because the public sector is the primary buyer of goods and services. For example, it’s very difficult to reinvent the way teachers use student data in America — at least at large scale — without crashing into a fragmented labyrinth of public sector procurement processes. In other cases, it’s because the public sector is setting the rules of the competition, sometimes in subtle ways. They may define who is allowed to offer a particular service or they may place requirements on what someone offering a service must do or be.

Why deal with this hassle? First, many of the most important challenges facing our world sit squarely in the middle of some of our most highly regulated sectors. Second, these same sectors are the ones with the huge, juicy problems to be solved. Third, these sectors are absolutely massive. Education, health, energy, transportation, agriculture, and financial services together represent more than 50% of the GDP around the world. Finally, if you’re the entrepreneur that’s able to hack a business model that scales in a highly regulated industry then the odds are good — fairly or unfairly — that you’re also building barriers that will keep other competitors out.

As startups begin swarming these industries, they’re running straight into these realities. Some lament this fact. The winning startups deal with it pragmatically. Hacking regulation — whether navigating procurement rules or running end-arounds past taxi commissions — is becoming an essential skill set for success. If you really want to change the world by tackling an important problem, you have to have a revolutionary new product and business model and you need to figure out how to change — or circumvent — the regulations that are keeping the world the way it is. And you’ll likely have to do so in the face of huge entrenched interests trying to stop you.

The startups that win will be the ones with access to the elite regulatory hackers.