Posted on September 10, 2014 by
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.