How to Disrupt Regulated Industries

We have our differences. One of us lives in Jerusalem. The other in New York. One of us makes a living investing in startups based in Israel. The other puts food on the table by helping startups navigate U.S. politics. One of us is a die-hard Yankees fan (ironically, not the New Yorker). The other thinks less of him for it.

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But over the last few years, our lives have converged around one undeniable reality: every new company is tech-enabled in one way or another; the vast majority of industries are regulated; and if startups don’t take government, politics and regulation seriously, they’re going to pay a heavy price. In working together to help startups we’ve both invested in, such as Lemonade and Nexar, deal with the good and bad that politics and regulation have to offer, we’ve learned a few lessons along the way.

1. Disrupting regulated industries is very, very hard. Entrenched interests don’t say thank you when you disrupt them. They punch you in the nose. If you’re not prepared to either slip the punch or hit back, you’re going to lose. It doesn’t matter that you went to Technion or Stanford. It doesn’t matter how big your Series A was. It doesn’t matter how smart you are. No one in politics cares. You need to be able to play the game.

2. Disrupting regulated industries requires a different skill set than what makes frictionless startups successful. Of course companies like Google and Facebook are revolutionary. But in some ways, they had it easy. No one was really doing what either of them created so they didn’t have to fight the status quo, overturn regulations, combat pay-to-play politics, or spend their time and resources focused on something other than creating their platforms and growing revenues. That’s unfortunately not the case for most startups in regulated industries. You need people who know the ins and outs of state capitol buildings, mayor’s offices, and Washington, D.C. You need more than just online marketing and a great product. You also need to know how to fill out forms—lots of them—but not only that.

3. Dealing with regulators requires a unique mix of patience, respect, guile and toughness. Anyone who tells you there’s one way to deal with a politician or a regulator doesn’t know anything about politics or regulation. Every jurisdiction, every industry, and every context is different. The political dynamics for taxi regulation in Phoenix are vastly different than the dynamics for drone regulation in Chicago. The political context for worker classification in Alabama is vastly different than the political context for e-sports regulations in Nevada. And that’s just the U.S. Knowing how and when to fight back and how and when to seek peace, and when to ask for permission and when to beg for forgiveness means understanding the context in each industry and each jurisdiction. Failure to do so can be fatal.

4. Regulators and entrepreneurs are nothing alike. Typically, Bradley’s day goes along these lines: (1) an entrepreneur develops a new idea, technology, platform; (2) the law is silent as to that new idea because if the lawmakers could envision new technology, they’d be entrepreneurs and not bureaucrats; (3) the regulator doesn’t quite know what to do since there’s no clear legal direction; (4) the industry being disrupted leans heavily on the politician who appointed the regulator to take action; and (5) he and his team have to beat the crap out of the entrenched interest; and then (6) convince the regulator that the law is fine as is (and sometimes we have to change the law). But sometimes the opposite is true — we need to work closely with them, be proactive, propose regulatory structures, propose new rules and procedures. A regulator is not going to be immediately swayed by buzzwords like disruption or disintermediation and a regulator is not going to share your vision of the future. If you can’t put yourselves in their shoes and try to see the world their way, you can’t successfully get what you need from them. Plus different regulators have different motivations. Some are by design. Others are defined by the personality of the individual regulator. Whether the regulator is supposed to protect the consumer or the industry and what protecting a consumer, an industry or his/her own butt is defined as varies from regulation to regulation and regulator to regulator.

(5). Often, it’s worth the time and effort to deal with regulators. There are some cases where a platform or a product is so popular, it inspires great passion among customers. Mobilizing those customers against bad regulations can work, as it has frequently for startups like Uber and FanDuel. But in most cases, you can’t rely on your customers to save the day. You might need to use a mix of carrots and sticks to get a regulator to go along, but the notion that every startup can just follow the Uber model is dangerous (and the Uber model itself came with a host of negative reputational ramifications that hurt the company in other ways). So, unless you’re one of those rare startups that can overwhelm the politics with hundreds of thousands of emails and tweets from your customers, you need to at least be prepared to work with regulators, go through their process, and push them when you need to (often through political pressure). But just because a regulatory approach worked for one or two startups doesn’t mean it’ll work for you. Together, we used a series of tactics to help convince the New York Department of Financial Services to grant Lemonade a license to sell insurance. Some of them came from just pushing the regulators hard to move quickly. And some came from making the case from the outside (legislators, the governor’s office, other state agencies, the media, the tech community). In Florida, the regulators weren’t hostile but the underlying statute was. We ended up having to pass “The Lemonade Act“ through the Florida legislature just so we could operate in the Sunshine State. It varies in every case, but the one thing you can count on is that it’s almost never easy.

(6). Don’t underestimate the potential to turn government into revenue too. Yes, the public procurement process is miserably slow. It’s bureaucratic. Political. Sometimes even corrupt (though, usually, it isn’t). But guess what? B2B procurement is often slow, bureaucratic and political, too. Far too many startups let their perceptions about government dissuade them from pursuing public sector revenue. Knowing what you can sell to government (at all levels — federal, state, local), what it’d take to win, and understanding the return on investment compared to your other sales and marketing efforts is not only important — ignoring it is stupid.

Disrupting regulated industries offers tremendous economic potential and even more societal value. From transportation to energy to hospitality to education to healthcare to manufacturing to retail, so many industries can be dramatically improved. Those improvements can offer a higher quality of life to billions of people (once a product is at scale) and can turn into companies worth billions of dollars. But it doesn’t only happen by having a great idea or user interface or Instagram feed. It comes from knowing who you’re disrupting, what the laws are in each jurisdiction, how the politics work and what it’ll take to win. Get that right and the possibilities are limitless. Get it wrong and you’ll wish you’d listened to your parents and gone to dental school. It’s not rocket science. But it’s also nothing like what you’ve done before. Make sure you take the time and devote the resources to get it right.

Bradley Tusk is an venture capitalist and political strategist who specializes in helping startups navigate government regulations. He is the CEO of New York-based Tusk Holdings and a former deputy governor of Illinois and a former campaign manager for Michael Bloomberg’s mayoral reelection bid. Michael Eisenberg is a co-founder and partner of Israel-based Aleph Venture Capital, and a board member of insurance startup Lemonade Inc. and dashcam startup Nexar Inc.