Hacking Regulated Markets to Drive Scale
Today virtually every home in the United States is required by law to have a carbon monoxide detector. However, it wasn’t until the late 1990s that the dangers of carbon monoxide poisoning (or the need for alarms) even came onto Americans’ radar. How did carbon monoxide detectors go from relative obscurity to near universal market adoption in a few short years? The answer may surprise you.
In 1995, fire-safety products manufacturer Kidde acquired Nighthawk, a startup that owned the patent on electrochemical carbon-monoxide (CO) sensors, marking Kidde’s entry into the carbon-monoxide and smoke-alarm markets. Armed with patent-protected technology, they set out to drive sales in the U.S.—only to have their efforts fall flat. Despite thousands of CO poisonings and hundreds of deaths each year, Americans simply did not know they needed CO alarms.
Kidde was left with the questions every innovator faces: How could the company create a market? And how could it to convince customers to act on a need they didn’t even know they had?
Enter regulatory hacking. First, by engaging with state legislatures and local regulators Kidde systematically worked to educate policymakers across the country, encouraging them to pass laws mandating the installation of CO detectors and alarms. Second, they leveraged public relations strategies to raise public awareness of carbon monoxide deaths and the need for a home alarm. And finally, they structured a partnership with retailers to ensure prime shelf placement for Kidde CO alarms.
As a result of a strategic and organized campaign, sales of Kidde CO alarms—and Kidde’s revenue—skyrocketed. Today, 29 states have enacted CO laws, and far fewer CO deaths occur each year.
So what does all this have to do with today’s startups? Everything.
Modern society is increasingly complex and digital. Every industry is being upended by technology and innovation, and entire regulatory frameworks are being challenged. Disruption will finally come to lethargic industries where government plays a key role – including education, healthcare, transportation, and energy.
This leaves entrepreneurs with massive opportunity to drive true, meaningful change in the markets with the biggest need—but it also presents major challenges to driving scale. The generally accepted strategies for scaling consumer startups are harder to apply when government plays a role that mucks up the works. Whether government is the buyer, controls access to the market, holds the data or oversees the rules that govern market behavior, it adds complexity that makes scaling a startup all the more risky.
Overlay entrenched interests (such as incumbent corporations or big institutions) that are motivated to keep the status quo, and the odds of successfully innovating become slimmer and slimmer—and if you’re an entrepreneur flying right in the face of regulations, targeting industries such as healthcare or energy, you’ve chosen the most difficult path.
Unfortunately, this causes many to turn away from the challenge, rather than pursuing their passions, building their companies and driving the change our world needs.
But there is good news. While Lean Startup has trained entrepreneurs to look beyond accepted boundaries to create new product concepts, so, too, should we look at the market models we use to drive scale. In markets where government plays a key role, this has never been more true.
At 1776, we believe that regulatory hacking is the best way to disrupt entrenched industries. Regulatory hacking means using the system to your advantage to drive scale, exerting outside influence on the system by engaging the public, or doing a complete end-around the system to force change from the outside. Fascinatingly, it’s a strategy big companies and trade groups have mastered and expertly used to their advantage for decades.
Now, though, it’s time for entrepreneurs to understand that this world exists, know how the various tools of the trade might fit into their startup growth toolkits, and employ the strategies that can most help them influence (or force) change and successfully scale their businesses.
This strategy starts at the top. It targets the industry’s big players—from VIPs and executives to experts and lawmakers. By getting this group on board with their vision, startups can gain credibility within the rest of industry. This can be as simple as securing a rockstar board of directors or advisory board, or it can be curating a list of industry influencers who are committed to opening doors for the company and speaking on the company’s behalf in public forums where they draw a major spotlight. Ultimately it’s about getting highly credible, highly influential people speaking on behalf of the company.
A grassroots strategy targets everyday citizens. By first building a loyal base of citizens, startups can present compelling evidence of product demand to any industry skeptics.
Uber is one of the best examples of a successful grassroots strategy. Knowing that asking permission from regulators would be a death sentence for their startup—and understanding that inevitably they would have to fight a battle with the taxi industry—Uber took a very smart, grassroots approach. Before jumping into a battle over state and local regulations, they first amassed a large, loyal user pool (especially focused on local, tech savvy influencers). When the company began to experience serious pushback from taxi commissions and city governments, their already-established customer base was instrumental in making the case on Uber’s behalf.
Going it alone can be hard, and this is especially true for startups tacking regulated markets. Building a coalition can help. A coalition is a group of organizations that come together to gain more influence and power than the individual organizations can achieve on their own. For a startup, this means getting other like-minded organizations carrying water along with you.
For example, I once worked with a company that sold shelf-stable breakfasts to schools. Their CEO was extremely passionate about getting low-income students breakfast and was troubled that so few students actually took advantage of the free breakfasts offered by their schools. I studied the issue and found that the logistics of getting to school early and the social stigma of eating breakfast in the cafeteria were at the root.
The solution seemed easy—move breakfast into the classroom—but execution proved challenging; very few teachers and janitors embraced this shift. So we created a coalition of like-minded organizations that all rallied around the idea of getting universal breakfast for all in the classroom. We called it the Got Breakfast Foundation. The group did everything from publicize the need for breakfast, share the data and studies with lawmakers, push for legislative change to offer grants to school districts and more. Together, this group accomplished far more than one single company could achieve on its own (and drove a lot of sales of shelf-stable breakfasts in the process!).
While all startups know that they’ll need to start doing PR at some point, very few really understand communications as a strategic tool for driving growth. An effective, inspirational, targeted and compelling PR campaign can be the difference maker for a young company.
HandUp, the winner of last year’s Challenge Cup, is a startup shaking up traditional poverty alleviation by allowing users to donate directly to a person in need in their community via an online interface. Cofounders Rose Broome and Zac Witte have adeptly used PR and communications strategy to drive the company’s growth. Smartly, their messaging is not about HandUp’s tools, per se. Rather, they shared their very inspirational founder’s story, emphasized that homelessness and poverty is something we can all agree needs to be solved, and focused on the juxtaposition of how far technology has come without giving us a way as individuals to meaningfully contribute to solving the poverty problem. As a result, they’ve caught the eye of the Wall Street Journal, USA Today, the CBS Evening News and other publications—driving more supporters, funders, donors and investors to HandUp.
Startups that can convince their industry that the data they collect through their service is useful not only for the broader public, but also to the industry itself, are often successful at breaking through regulations. As a result, those with a vested interest in getting access to the data can become serious channels for driving market scale.
RideScout, a mobile app that provides users with real-time information about all nearby transit options, used data as one of its major selling point. RideScout worked with universities to aggregate pools of users, and from that base was able to provide valuable data to the city about public transportation habits. It was simultaneously able to provide a convenient product and valuable data to its stakeholders and the transportation industry’s regulators. As a result, they were able to rapidly scale users all over the US, putting them on the radar to be acquired by Daimler.
The lion’s share of startup brainpower has not been going to regulated industries because founders assume they can’t scale in these markets. It’s time to change this so that the power of entrepreneurship can be unleashed on some of our world’s most important challenges. Startups can and should find innovative ways to work with, change, or eliminate the system keeping their solutions from the public. It’s time to hack the system.