The more transformative a business model is, the more likely it will be slowed or even stopped by regulatory roadblocks. Why? Remember that transformation comes from business models that use shiny new tools to combine existing and new capabilities into new customer value. These business models create new markets and/or wholly new ways to do business in existing markets. 

As a result, governments from municipal to federal often view upstarts as scofflaws. Existing businesses, especially those with aging business models locked in place by regulations, don’t understand or want the competition. 

This is not just a problem for startups. It's an even bigger risk for existing businesses that launch transformative business models, while still operating their core business model. These businesses may need to challenge regulations on one hand and defend regulations on the other. What could go wrong with that?! 

Startups present less-complicated examples, so let's see what might be learned from their successes — and their mistakes.

Approach #1: The Chameleon

In late October, genetics testing company 23andme celebrated its relaunch, sending co-founder Anne Wojcicki on a major-media tour touting its newly FDA-approved, genetics self-testing test kits. This relaunch came two years after the FDA forced 23andme to stop selling the test kits.

23andme had been at odds with the FDA since its 2006 launch. 23andme first marketed the test kits as a way for customers to learn about genetics — a product that didn't require FDA approval. The FDA disagreed. 23andme had no regulatory policy, nor anyone who could even speak the same language as the FDA, so this situation could only end badly.

After it was shut down, 23andme turned into a chameleon. It spent two years changing its color to an FDA-approved shade. During these two years, 23andme learned to communicate with the FDA and learned to work with the agency to meet standards. This required reworking some tests, dropping others, and improving the reporting of test results.

This may not seem like a successful approach, since it resulted in two years of lost sales. The chameleon strategy made sense for 23andme, however. Its core business isn't selling test kits to individuals, but selling enough of them to create a huge database of genetic information to sell to much bigger customers, such as pharmaceutical and medical device companies.

This business model was worth protecting. A few weeks before its relaunch, 23andme raised $115 million from investors, giving it a valuation of $1.1 billion.

Result: A win for 23andme, but a strategy that isn't likely to work for many other companies.

Approach #2: The House of Cards

It seems everybody except Uber's drivers and customers wants it off the road — the taxi and limousine industry, and governments from cities to countries. Uber fights each challenge aggressively, one by one. Sort of like pulling one card at a time from a house of cards, looking forward to the day it will collapse.

Likewise, it seems that everybody except Airbnb’s hosts and customers wants it out of their neighborhood. Municipalities demand local lodging taxes and enforce zoning restrictions. Residents claim that investors drive up home prices by buying properties solely to rent on Airbnb. The lodging industry complains about losing market share.

Like Uber, Airbnb has been pulling down a regulatory house of cards, one card at a time. But Airbnb takes a less aggressive approach, calmly speaking the language of government, working with tourism agencies and cities, citing research that it says shows it doesn't drive up house prices, steal business from hotels, or reduce taxes from the tourist trade.

Each adjusts according to the situation. Uber sometimes backs away from its aggressive approach. Airbnb can play hardball. It spent more than $8 million to successfully defeat San Francisco’s Proposition F, which would have cut into its business significantly.

Result: Wins for Uber and Airbnb. Other companies could learn some lessons here.

Approach #3: I Fought The Law, But The Law Won

For only $8 per month, Aereo rented each of its customers a micro-antenna to stream over-the-air TV stations. When a customer opened Aereo, a single antenna sent a signal to that person alone.

Aereo had bet the farm on a potential loophole in the Copyright Act of 1976. The company claimed that its service simply updated the use of single rooftop antennas, which was allowed under the Copyright Act as “private performance." This way, Aereo avoided the retransmission fees cable companies pay for “public performances.”

Aereo fought legal battles from its launch until a Supreme Court loss killed it.

Result: A loss for Aereo, and a strategy no company should emulate.

Three Tips For Dealing With Regulatory Roadblocks

1. Anticipate regulatory issues while still designing and testing the business model.

Proactive beats reactive every time. Here's how to get in front of any potential problem:

  • Explore potential regulatory obstacles to any part of your business model: customer value proposition, delivery method, and/or how value is delivered back to your company.
  • Design your business model to avoid or minimize legal challenges.
  • Create ways to test prototypes that will reveal potential regulatory issues.

Even if you don’t think your business model will invite legal challenges, get a second opinion anyway. A lawyer should be able to tell you if you’re about to walk into a fight. A lawyer, or maybe a linguist, can warn you if your business model hinges on a clever but incorrect interpretation of a law or regulation.

2. Understand how to work with government.

No one’s saying you shouldn’t or couldn't challenge regulations. But put some thought into it first.

  • The language of government is probably not your native tongue, so make sure someone on your leadership team can speak government.
  • Government is complex, so put some resources into working with it. You'll need a team of experts in public relations, lobbying, and law.
  • Find proactive solutions so you can cooperate, instead of being forced.

After 23andme shut down, it hired a regulatory officer to smooth out its relationship with the FDA. And cooperation was at the heart of 23andme's chameleon strategy. Airbnb has begun to work with cities on issues such as taxes. Both Uber and Airbnb have recently hired star political insiders as policy chiefs. Uber has even said it will work with regulators, in some cases. 

Putting together a policy team is quickly becoming table stakes for startups. Just today, the New York Times published Startup Leaders Embrace Lobbying.

3. Don't be a jerk.

Uber has added rider-friendly features to its app and has donated $5.5 million to Carnegie-Mellon University. Airbnb has participated in community-service projects and provided free housing to victims of natural disasters. 23andme can now rightly claim that its genetics test kits are safer and their results reports more consumer-friendly.

Being a good corporate citizen can't hurt — and it could help.

Image from Flickr, copyright 38Degree.

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