Steve Blank What your start-up needs to know about regulated markets

The opposite of disruption is often the status quo.

If you are a startup that is trying to disrupt an existing business, you must read The repairer by Bradley Tusk and Regulatory piracy by Evan Burfield. These two books, one from a practitioner, the other from an investor, are inescapable.

The repairer is 1/3rd autobiography, 1/3rd case studies and 1/3rd a practical manual. Regulatory piracy is closer to a "step-by-step" manual with case studies.

Here's why you have to read them.

One of the great benefits of teaching has been to see the innovative, unique, revolutionary and sometimes simply crazy ideas of my students. They use the template of the business model (or mission model) to track their key assumptions, then test them quickly by talking to customers and iterating their viable minimum products. This allows them to quickly find a product / market fit.

Except when they are in a regulated market.

All companies have rules to follow: pay taxes, incorporate the company, comply with financial reports. And some must make sure that there are no patents or blocking patents. But regulated markets are different. Regulated markets are those that have a significant government regulations promote (apparently) the public interest. In theory, there are regulations to protect public interest in favor of all citizens. A good example is the FDA (Food and Drug Administration) regulation for the approval of new drugs and medical devices.

In a regulated market, the government controls how goods and services are allowed to enter the market, the prices that can be charged, the characteristics that the product / service must possess, product safety, environmental regulation, labor legislation, national / foreign content, etc.

In the United States, regulation occurs at three levels:

  • Federal laws applicable throughout the country are developed by the federal government in Washington.
  • state laws that are applicable in a state are imposed by the state government
  • the local laws of cities and counties come from the local government.

Federal government
In the United States, the national government has the power to regulate interstate commerce, foreign trade and other commercial activities of national scope and interest. Congress decides what needs to be regulated and enacts laws that determine these regulations. The Congress often does not include all the necessary details to explain how a person, a company, a state or local government, or others, could comply with the law. For the laws to work day by day, the Congress allows certain government agencies to draft regulations that set specific requirements for what is legal and what is not. Regulators then oversee these requirements.

In the United States, startups may run into a soup of the alphabet from federal regulators, for example; ATF, CFPB, DEA, EPA, FAA, FCC, FDA, FDIC, FERC, FTC, OCC, OSHA, SEC. These agencies exist because the Congress passed laws.

In addition to federal laws, each state has its own regulatory environment that applies to companies operating on its territory in areas such as land use, zoning, motor vehicles, banking and land use. the state, building codes, utilities, drug laws, etc.

Cities / counties
Finally, local municipalities (cities, counties) may have local laws and regulatory agencies or departments such as taxi boards, zoning laws, public safety, permits, building codes, laws sanitation, drugs, etc.

A gaming book to enter a regulated market
The battles of startups with regulatory agencies – like Uber with local taxi licensing laws, AirBnB with local zoning laws and Tesla with dealer licenses – are legendary. Each of them is an example of a start disrupting regulated markets.

There is nothing magic about dealing with regulated markets. However, each regulated market has its own rules, dynamics, language, actors, politics, etc. And they are all very different from the markets from business to consumer or from business to business, most of the founders and their investors are familiar with.

How do you know that you are in a regulated market? It's simple: ask yourself two questions:

  • Can I do what I want or are there laws and regulations that could stop or slow me down?
  • Are there operators who will consider us a threat to the status quo?? Can they use laws and regulations to hinder our growth?

Diagram of your business model
The best way to start is to draw a business template template. In the customer segment area, you will discover that there may be 5, 10 different players or more: users, beneficiaries, stakeholders, payers, saboteur, rent seeker, influencers, bureaucrats, politicians, regulators. Coming out of the building and talking to people, you will discover more and more players.

Instead of grouping them together, each of these users, beneficiaries, stakeholders, payers, saboteurs, rent seekers, etc. separate Canvas value proposition. It is there that you begin to determine not only their pains, their earnings and the tasks at hand, but also the products / services that solve those pains and those gains. In doing so, you will discover that the interests of the end user of your product versus a regulator versus a rights group, key opinion leaders, or politician are radically different. For you to succeed you must understand them all.

One of the critical points to understand is the operation of the regulatory process. For example, do you simply fill out an online form and pay $ 50 of fees with your credit card and get a license? Or do you need to spend millions of dollars and years in clinical trials to get FDA approval and approval? And are these approvals good in all states? In every country? What should you do to sell worldwide?

Find the saboteurs and the rent seekers
One of the peculiarities of entering a regulated market is that incumbents have arrived first and have "played the system" in their favor. Rent Seekers are individuals or organizations with strong business models that view government and regulators as their first line of defense against innovative competition. They use government regulation and lawsuits to prevent the entry of new entrants who could threaten their business models. They use every argument from public safety to lack of quality or job loss to lobby new entrants. Rent seekers spend money to increase their market share instead of creating new products or markets nothing of value.

These obstacles to new innovative startups are called Economic rent. Examples of economic rent include national automobile franchise laws, taxi medallion laws, charter school limits, cable company monopolies, patent inspectors, bribery of public servants, corruption and regulation.

Lobbyists looking for rent address directly to the legislative bodies (Congresses, State Legislatures, City Councils) to persuade government officials to enact laws and regulations in exchange of an election campaign contributions, soothing influential voting blocks or future jobs in the regulated industry. They too use the courts to tie up and exhaust a business limited financial resources. Lobbyists also work through regulatory bodies such as FCC, SECOND, FTCCommissions for public services, taxis or insurance, school boards, etc.

Although most regulators were originally created to protect the health and safety of the population or to provide a level playing field, overtime the very people that they are supposed to regulate capture regulatory bodies. Rent seekers benefit from regulatory capture protect their interests against new innovators.

Understand who pays
For revenue streams, determine who will pay. Is it the end user? An insurer? Another third? If it's the government, hang on to your seat because you now have to deal with public procurement and / or repayment. These payers also need a template for value proposition.

Customer Relationship
When it comes to customer relations, it's much more complex to determine how to "get, keep and grow" customers in a regulated market than "let Google Adwords buy". Entry into a regulated market often involves many more moving parts and is much more expensive than a traditional market. It requires lobbyists, key opinion leaders, political donations, advocacy groups, popular grassroots campaigns, and so on.

Diagram of customer segment relationships
Begin to schematize the relationships of all customer segments. Who influences who? How do they interconnect? What laws and regulations do you have on the path of deployment and scale? What is the power of each player? For politicians, what are their public positions in relation to actual votes and performances. Follow the money. If the main donor of an elected representative is organization x, you will not be able to convince him with a convincing argument.

The book Regulatory piracy call this diagram the Power card. For example, it is a diagram of the multiple beneficiaries and stakeholders that a mathematics computing software development company intended for college students must go through. Your diagram may be more complex. It is not possible to draw this on the first day of your startup. You will discover these players leaving the building and start filling your paintings with value propositions.

Contest Diagram
Next, draw a diagram of the competing petals of competitors and adjacent market players. Who is already serving the users you are targeting? Which companies do you disrupt?

I always thought that my startup was the center of the universe. So put your business in the center of the slide.

In this example, the startup creates a new category – a lifelong learning network for entrepreneurs. To indicate the origin of their customers in this new market, they shot the 5 adjacent market segments they believed their future customers were today: business, higher education, startup ecosystem, institutions and adult learning. To illustrate this, they drew these adjacent markets as a cloud surrounding their business. (Unlike the traditional X / Y chart, you can draw as many adjacent market segments as you like.)

Fill in the market spaces with the names of the companies that are representative actors of each of the adjacent markets.

Strategy Diagram
Finally, draw your strategy diagram. How are you going to create a repeatable and scalable sales process? What regulatory issues need to be resolved? In which order? What is step 1? Then step 2? For example, asking for forgiveness or asking permission? How do you get regulators who do not see the need to change to move? And do you do it in your life? How do you get your first customers to defend their interests?

I have sketched an example diagram of some of the things to consider in the figure below. Both The repairer and Regulatory piracy give some excellent examples of regulatory pitfalls, problems and suggested solutions.

The politicians
If you read Tusk's book, The Fixer, you will find that the political process in the United States follows the golden rule: it is the one who has the gold that sets the rules. It's a personal account of someone who was in the thick of politics – Tusk was deputy governor of Illinois, campaign manager of Mike Bloomberg, director of communications for Senator Charles Schumer, and was running successfully Uber's first campaign for regulatory approval in New York. And he is as cynical about politicians as possible. On the other hand, Regulatory piracy by is written by someone who understands Washington – but who still has to work on it.

Read the two books.

Lessons learned

  • Regulated markets have different rules and actors from traditional B2B or B2B markets
  • Entry into a regulated market should be a strategy and not a set of disconnected tactics
    • You must understand the laws and regulations at the federal, regional and local levels.
    • Your board and you must be in tune with the costs and risks of entering these markets.
    • Strategic choices include: asking permission or forgiveness, public or private battles
  • Most start-ups do not have in-house regulatory expertise. Get outside advice at every step

Classified in: Business / Government, Customer Development |