In case you missed it, HBR has a nice piece on how startups often skirt (or ignore) laws during their early stages of growth. Some excerpts below:

One of the unheralded advantages of a startup is what at first glance appears to be its weakness. Initially, a startup has no business model and no market share to defend. Its employees and investors don’t depend on an existing revenue stream. If they select a business model that targets industry incumbents, they don’t have to worry about upsetting existing customers, partners, or distribution channels.

Yet those very weaknesses give startups an overwhelming advantage in innovation. Startups can try any idea and any business model — even those that on the surface are patently illegal.

Here are some of the most visible examples.

Uber, current valuation >$70 billion, knew the day it started that its ride-sharing service violated the law in most jurisdictions. Carrying passengers for payment, historically considered commercial use, was regulated in most cities. In addition, some cities put an artificial limit on the number of taxi operators by requiring them to buy medallions and agree to a set of local regulations. Uber ignored all of these requirements and reinvented local transportation by offering a more convenient service. Today New York City has 13,587 yellow-taxi medallions and more than 50,000 Uber and Lyft cars.

PayPal, acquired by eBay for $1.5 billion three years after it was founded, started as a money transfer system for buyers and sellers on eBay. Banks protested that PayPal was an unregulated bank; banks, of course, are regulated by the federal government and states. As PayPal grew, incumbent banks forced it to register in each state. Ironically, once PayPal complied with state regulations by registering as a money transmitter on a state-by-state basis, it created a barrier to entry for future entrants.

Airbnb, current valuation $31 billion, allows people to rent out their homes, rooms, or apartments to visitors. Not surprisingly, Airbnb violates local housing laws and regulations in many cities. None of the renters pay hotel or tourist taxes. Every Airbnb rental is a lost night of revenue for the hotels that hate it. The company has more rooms available than any hotel chain.

Tesla, current valuation $50 billion, sells cars directly through its own distribution channel. To protect auto dealerships in the 1920s, direct sales by an automobile manufacturer were made illegal in most U.S. states. Because Tesla believed that existing auto dealers would have no incentive to sell electric cars, it created an alternative option for consumers.

Yet trying to stay within the legal lines, companies paint themselves into a corner by creating their own internal barriers to innovation. Instead of innovating, most industries being disrupted turn to litigation.

Corporations using existing business models have people, processes, and revenue goals that can’t be changed overnight. These incumbents tend to have short-term goals and incentives (stock price, quarterly earnings, year-end bonuses) and often fail to recognize that more money can be made on new platforms and new distribution channels. In each case, litigation versus innovation seems an obvious choice.

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Posted by Carlos Alvarenga

Carlos A. Alvarenga is the Executive Director of World 50 Labs and Adjunct Professor in the Logistics, Business and Public Policy Department at the University of Maryland’s Robert E. Smith School of Business.

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