Reframing Laws as Opportunities

Unlocking potential by breaking, following, or shaping the law.

Across industries, innovators are pushing the limits of what is possible, and what is possible is frequently informed by the law. Though laws are commonly viewed as barriers, successful entrepreneurs realize that constraints present opportunities. In this article, we explore where laws come from and how different companies have used regulation to fuel growth.

Where Most Laws Actually Come From

High school civics teaches us that laws are made by Congress. Think “I’m Just a Bill” from Schoolhouse Rock. Though not wrong per se, that is a narrow conception of where laws come from. It leaves out a key player that has grown in importance over the last century: administrative agencies. Think the Food and Drug Administration, the Department of Transportation, or the Environmental Protection Agency. The Fourth Branch of government. Or more critically, the unelected federal bureaucracy.

Agency Domination

Administrative agencies have become the primary source of lawmaking in America. Agencies have the power to create rules and regulations through a process called rulemaking which is governed by the Administrative Procedure Act. Through authorizing statutes, Congress can delegate some of its legislative authority to bureaucrats who are closer to the issues and have specialized expertise. The president appoints (and can remove) the heads of agencies and thus wields considerable power. Compared with traditional congressional lawmaking, rulemaking is much simpler and less political. Apart from process, the distinction between “rules” promulgated by agencies and “laws” made by Congress is largely in name only. Both are laws that everyone must follow.

Interestingly, nobody knows exactly how many agencies there are. Estimates hover somewhere between 80 and 200 federal regulatory agencies. But one thing is certain: agencies create way more rules than Congress passes laws. In 2021, federal agencies issued 3,257 rules while Congress passed 143 laws. That means agencies issued ~23 rules for every law Congress passed. Viewed over several years, it is clear that the bulk of lawmaking happens outside the traditional conception of Congress.

Regulatory Accumulation as a Growth Catalyst

So where does that leave us? With a lot more regulation. Regulatory accumulation has spurred the growth of in-house compliance functions and startups like Vanta or Secureframe which promise to alleviate the burdens of continuous monitoring. Not only does the abundance of regulation necessitate compliance, it also creates opportunities for innovation. Among the businesses that interact with the regulatory state, their responses can be categorized into those that (1) break the law (2) follow it or (3) forge ahead and shape it.

(1) Break the Law

"If you must break the law, do it to seize power: in all other cases observe it." - Julius Caesar

Uber’s ride-sharing platform is the canonical example of breaking the law to build a business. Uber means “above all else”. While that might be a stretch, co-founder Travis Kalanick certainly believed they were above the law. As the Uber files leak revealed, the tech giant routinely broke laws and regulations to launch in cities across the world and entrench a new app-based gig economy model for work. Uber's strategy was to flout the law, build consumer favor, and aggressively lobby governments to change the law. If they were unable to change the law, they’d pay a fine and move on.

Despite Uber’s success, there are dozens of companies that don’t make it. Consider a lesser known startup called Leap Transit. Leap was a tech-friendly luxury bus service that charged $6 per ride. Like Uber, Leap’s strategy was to seek state regulation which offers the potential for less oversight and fewer rules than city regulation. However, in the interim, they failed to secure the necessary city permits. The California Public Utility Commission (CPUC) said that by driving its buses without a permit, Leap broke the law. To make things worse, Leap also violated several public utility codes and removed wheelchair ramps in violation of the Americans with Disabilities Act. In 2015, CPUC issued a cease and desist letter which forced Leap to shut down.

💡 The line between “successfully” and “unsuccessfully” breaking the law is thin. Uber violated many rules. But Leap went too far. Often, these are intuitive boundaries. The subliminal message seems to be: break the law, but retain your popularity. And perhaps, get lucky.

(2) Follow The Law

“Far more violence has been done in obeying the law than in breaking the law.” - Robert Frost

In the search for a working business model, other startups focus on compliance - aka following the law. Content distribution is a prime example. Spotify was created to combat the problem of illegally shared music. After Napster flamed out due to unauthorized distribution of copyrighted material, Daniel Ek and Martin Lorentzon wanted to create a service that was better than piracy. Spotify negotiated licensing deals with Sony, Universal Music Group, Warner Music Group, and EMI (now a part of UMG) and bought rights to the music that their platform would stream and share. They created a new business model by following the rules. While artists like Taylor Swift criticized the platform for unfairly compensating artists, Spotify is still widely regarded as a success. Convenience and legality meaningfully cut into the market for piracy.

A smaller group of companies have created value by following the law through periods of change. For example, during COVID-19, the Drug Enforcement Administration announced a regulatory exception for e-prescriptions which rolled back provisions in the Controlled Substances Act. Under the new rule, doctors could prescribe certain controlled substances without an in-person medical evaluation. Once the rules were relaxed, telehealth companies like Hims and ADHD care companies like Done experienced significant growth. It remains to be seen how pandemic era telehealth regulation fares, and how these companies will evolve in response.

💡 The important takeaway is that the law is not a static body. Things change. And following those changes can create meaningful opportunities.

(3) Shape the Law

"If we desire respect for the law, we must first make the law respectable." - Louis D. Brandeis

The third response involves companies that neither break nor follow the law. Instead, they actively try to shape the regulatory process. The best example is OpenAI. Apart from being everyone’s favorite dinner-table topic, OpenAI is a prime example of a new tech company forging a path into unknown legal territory. On Tuesday, the Senate Judiciary subcommittee on privacy, technology and the law welcomed OpenAI’s CEO Sam Altman, New York University professor emeritus Gary Marcus, and IBM executive Christina Montgomery to testify about artificial intelligence and the best approaches to regulation. At the hearings, Altman called for new legislation requiring licenses to develop large language models (LLMs). Dr. Marcus cautioned against corporate irresponsibility, widespread deployment without adequate regulation, and inherent unreliability.

Altman’s stance at the hearing makes sense in light of recent developments. This leaked Google memo claims that open source AI will outcompete both OpenAI and Google. In other words, competition with open source is a losing battle. When it comes to LLMs, no company has a defensible moat. Against those odds, regulatory capture offers an effective way to establish a strong position in the market. OpenAI recognizes that the law surrounding AI is still evolving, and wants to influence its development to align with its interests.

💡 The law is a fundamentally human endeavor with many imperfections. Gaps in regulatory frameworks can pave the way for proactive engagement in shaping the law. This week’s AI headlines are just the tip of the iceberg.

From breaking the law like Uber to following the law like Spotify to shaping the law like OpenAI, successful companies have navigated the changing regulatory landscape to their advantage. Ultimately, the law is a dynamic entity, and understanding its intricacies can unlock context-specific opportunities for growth.