'Regulatory Hacking': How startups and governments can work together to change the world

[caption id=”attachment_24195” align=”alignnone” width=”4250”] Evan Burfield speaking at Startup Turkey (Photo: Startup Turkey)[/caption]

Silicon Valley’s approach to disruption is often hindered by hubris or naiveté, but neither of these are sustainable business strategies in highly-regulated industries, where bureaucratic, political and legal barriers are inevitable impediments to startup innovation, especially for those who think they can just ‘Uber’ their way to success.

Evan Burfield, cofounder of the government technology venture capital firm 1776 and author of the new book “Regulatory Hacking,” shares how startups can engineer better strategies to work with government and navigate the bureaucratic and legislative process.

Billed as a playbook for startups, “Regulatory Hacking” is a manual for both entrepreneurs and government leaders that can help these seemingly strange bedfellows bridge their culture differences and collaboratively facilitate positive, exponential, societal change.

What is ‘Regulatory Hacking?’

Regulatory hacking is how to build a startup in a complex, regulated market that is deeply intertwined with government.

Silicon Valley has refined a playbook for building startups that works great for dating apps and photo sharing–from the blogs of Paul Graham to Steve Blank’s lean startup methodology. But this playbook offers limited guidance when you’re building a startup in a complex market where you’re ability to navigate around government–or better yet to turn government into an active ally–is the difference between success and failure.

To the extent that Silicon Valley thinks about this challenge, it often reverts to the “Uber playbook” of stacking up a bunch of cash and attempting to “roll government.” But this is a naive way of approaching these markets. In fact, when you are genuinely building a product or service that can meaningfully improve the lives of millions or billions of people, then government can often be your biggest supporter.

Why is the book important now?

The past twenty years of startups and venture capital have radically transformed our lives as consumers–from Amazon to iPhones, Facebook to Uber.

But the next twenty years will look very different. The giant returns–financially and in terms of impact–will come from transforming our lives as citizens. This means interacting with government. We are entering the Regulatory Era for startups and venture capital.

There are five specific trends driving this:

1. Tech startups are diversifying beyond Silicon Valley to other cities to take advantage of expertise and history in agriculture, manufacturing, or healthcare.
2. The easy problems in tech have been solved. The next focus is on industries that are still in the early phases of digital transformation.
3. We're seeing a backlash against Big Tech, forcing the tech startup ecosystem to adapt to a new reality.
4. Startups are solving urgent problems that would previously have been left to government or nonprofits, such as sustainable cities and infrastructure.
5. The technologies of science fiction are becoming a reality. In that the new reality of self-driving cars, brain-computer interfaces and cryptocurrencies, regulators will inevitably play a role much earlier than they did in the consumer-tech world.

To win in the Regulatory Era, founders, funders, executives, and policymakers will need to get smart about regulatory hacking.

How did the inspiration, ideas and thesis for ‘Regulatory Hacking’ come about?

I’ve always been fascinated by the interplay between the worlds of startups and government–and have spent much of my life bouncing between the two. My work with 1776 and our global Challenge Cup program gave me exposure to founders around the world that were struggling to apply the Silicon Valley playbook to industries like health, education, energy, transportation, financial services, food, and security. Over time, we started to evolve a new approach, which became regulatory hacking.  So regulatory hacking was really an organic response to startups adapting to market forces.

The impetus for the book was actually pretty random. I appeared on an a16z podcast and we ended up talking about regulatory hacking. The podcast got a lot of traction and then I got an email from an editor with Portfolio within Penguin Random House. It took 18 months to turn that kernel of an idea into a complete book with startup stories from around the world.

What industries do you see the biggest need for regulatory hacking?

Goodness, it’s hard to just pick a few. As I argue in the book, the significant majority of the global economy operate within these highly regulated sectors. And these are also the sectors that the digital revolution has barely touched. The obvious ones are health, energy, transportation, government services, education, agriculture and food, financial services, and security. But some of the coolest startups that I profile in the book don’t fit neatly into any one of those categories, like HopSkipDrive in Los Angeles or Twiga in Nairobi. They’re improving citizens’ lives in ways that cut across industries.

You’ve mentioned before that Elon Musk is the quintessential regulatory hacker? Can you elaborate?

Elon Musk is absolutely the Ultimate Regulatory Hacker.

Each of the startups he’s helped drive–PayPal, SpaceX, Tesla, SolarCity, The Boring Company, and Neuralink–operate in exceptionally regulated sectors. He’s incredibly good at turning government into an ally for his companies, and in cases where he needs to get around inconvenient regulation he’s been really sophisticated in how he’s done that. In the conclusion of the book, I show how he’s used almost every one of the hacks I talk about throughout the book.

I would argue that the real story of Elon Musk is that he was the first person in the Valley to figure out that the major returns were going to come from interacting with government to improve the public interest, and he got smart about how to do so before anybody else.

What other companies are doing ‘Regulatory Hacking’ right, and how so?

We profile more than forty startups in the book. It includes Silicon Valley stalwarts like Uber, Airbnb, and 23andMe. But we also show how startups all around the world are employing sophisticated regulatory hacks. Startups like Twiga in Nairobi, BitOasis in Dubai, or Nuritas in Dublin.

Nuritas is a great example. They’re using artificial intelligence to analyze genetic data to identify compounds that naturally appear in food, which they can repurpose for health or pharmaceutical purposes. These compounds are highly regulated by organizations such as the US FDA. Nuritas has actually turned this into an advantage though. They’ve loaded up the regulatory standards into their artificial intelligence system, so that they focus on compounds that achieve health benefits and that they know will be easily approved by regulators. This to me is a great example of the kinds of startups that will win in the Regulatory Era.

Who’s doing it wrong, and what’s your advice to them?

That’s a loaded question. You can’t talk about regulatory hacking without engaging with Uber. They are the example that everyone jumps to when you talk about Silicon Valley and government colliding. But as I talk about in the book, they are such a unique outlier in terms of startups engaging with government. First, they were genuinely facing “iron triangles” in each city they entered. Taxi commissions were never going to give them permission if they just asked nicely. Uber had to figure out how to fight. But Uber was also taking on an industry where incumbent taxi operators were usually hated by citizens. And the regulations that Uber was fighting against were pretty esoteric versus the benefits that citizens received from using Uber. So it was easy for Uber to turn early adopter users into vocal citizen armies who would march to their city councils to get regulations changed. Almost no other startup that I’ve found has faced a similar dynamic, which is why the Uber playbook can be so destructive when Silicon Valley applies it as a blanket strategy for how to deal with government.

The idea that a startup can change the world but first they must change government or disrupt policy is intimidating for impatient entrepreneurs and their investors. What’s your practical and inspirational advice to startup founders and venture capitalists wary of getting into markets with high potential for government friction?

If you’re a 25-year-old Stanford grad sitting in San Francisco, then life looks pretty amazing. You can get entertainment, transportation, food, laundry, and even a massage with the push of a button on your iPhone.

But if you’re a single mother in Cincinnati that needs to take a bus to and from two jobs to keep food on the table for your kids, it’s much harder to see how the last twenty years of the digital revolution have actually improved your life. This gap is the current generation of entrepreneurs defining challenge.

This is where you’ll find the next massive financial fortunes. But it’s also where you will genuinely change the world, not just sound cool at your next TedTalk.

And if you want to solve those problems, then you better get really smart about regulatory hacking.

Regulatory Hacking: A Playbook for Startups Evan Burfield, J.D. Harrison Hardcover, 320 pages Portfolio Purchase