Big technology companies naturally want to stretch the limits of what they are allowed to do within the confines of the law, but effective regulators are supposed to keep them within these guidelines. The only problem is that there is much much more money to be made on the other side of the technical word of the law. So over time, they have developed a foolproof system for getting around these legal suggestions to access markets that nobody else thought was possible.
Uber got around taxi regulations, food delivery apps, minimum wage laws, buy now pay later services, consumer lending standards. Airbnb got around hotel licensing and zoning laws, crowdfunding investment standards. And then there are even more obvious examples like bet on everything platforms that have skirted gambling regulations, not to mention age limits based on extremely flimsy financial technicalities.
This isn't even touching the absolute dumpster fire that has been allowed in the gray areas of cryptocurrency. But the thing is, every single one of these companies that bravely chose to venture where the law said they couldn't are all worth billions of dollars today. In the battle between technology and the law, technology is winning every single time.
In the short term, there are actually some genuine benefits to workers and consumers by breaking down rigid structures. But if they were willing to bend the rules in our favor to get us on board in the first place, it sets a pretty bad precedent once they have captured a market, which is exactly what we are seeing today. Now, the solution is effective, well-funded, and well staffed regulators to make sure that these businesses are abiding by the word of the law from day one.
But come on, let's be honest with ourselves. We all know that's not happening anytime soon. So instead of that, the best way to see this problem in action is to go through the process step by step so that if you yourself want to build a billion-dollar tech platform by skirting the word of the law, at least you will have the tried and tested game plan for doing it right.
>> Lawmakers are scrambling to create some new rules for prediction markets like >> poly markets say their users are not gamblers but financial traders. These prediction markets are qualitatively different than sports gambling for for a couple of reasons. I like to think about prediction markets as the next generation of the news.
>> This isn't about someone renting out a spare bedroom to help pay their mortgage. That's not what we're talking about. And I think Airbnb likes to hide behind that.
>> It's also reminding them of the many other regulatory battles that these companies are fighting in a number of states and countries. Now, in the case of this law >> in New York, yellow taxis dominated for 30 years because they understood how to navigate the political process in New York. Okay, so this business strategy isn't actually anything that new by itself.
It's called regulatory arbitrage, and it's been a tool for opportunistic businesses for as long as rules have existed. The idea is that if you can find a loophole or gray area in the word of the law, you can bring a more competitive product to market than your competitors working within the spirit of the law. The term itself gained popularity in the 1980s when the Basel Accords attempted to introduce a series of best practices for the global financial system.
Banks in different countries operating under different central banks had different capital requirements, which in plain English meant that they had to keep a different amount of their total deposits on hand instead of lending them out. In some countries, banks only had to keep 5% of their total deposits on hand, whereas in other countries, they had to keep as much as 25%. The banks that had to keep more cash sitting around were safer.
But because they couldn't lend the money out or invest it, they couldn't offer globally competitive interest rates, and they would naturally make lower profit. They figured out that by just having operations in the loosest legal jurisdictions, they could arbitrage the difference to gain an advantage over other banks operating to the standards of that market. Ironically, Basel 1 and subsequently Basel 2 and 3 have all been international agreements on banking regulation to avoid this kind of behavior.
But a lot of the financial system responded to these international baselines by doing more regulatory arbitrage. One trick was to open mortgage originator or non-bank lender operations that were funded by the bank, advertised by the bank, and managed by the bank, but weren't technically part of the bank. This let them write more mortgages for a given amount of capital than they would have otherwise been allowed to.
And well, we all know that eventually turned out super well. But today, this little game of find the loopholes before they get plugged has become much easier and even more profitable. So, if you want to get in on this action, step one is to find an industry with a lot of regulations that make it kind of terrible.
For our little company, let's go after schools. People generally don't like the school system, but competing normally in this market is kind of difficult because there are a lot of regulations around how these institutions are supposed to be run. These add costs, complexity, and rigidity that you won't need to worry about if you are able to follow through on the rest of this plan to build a cloud-based decentralized gig-based school system where freelance teachers can earn commissions for teaching classes.
The next step is to find a non-commercial version of your industry that is kind of similar enough to give you the don't worry about it bro legal defense. For Uber, it was don't worry about it, bro. These aren't fake taxis without proper registration.
They are people car pooling together. For Airbnb, it was, "Don't worry about it, bro. These aren't hotels operating outside of licensing and local zoning laws.
These are just friends who met online a day ago, becoming really short-term roommates for by now pay later. " Well, you guessed it. Don't worry, bro.
These aren't unregulated predatory loans made without lending licenses or standards. This is just store layaway handled online. For you in your new platform, let's call it something insufferable like Schooloolie.
You should go with the line, "Don't worry about it, bro. This isn't an unregistered school with unqualified teachers. " It's a network that lets parents share the burden of homeschooling with one another with some fees to cover the cost of running a class.
Now, this strategy won't work forever, but it doesn't need to. Modern network systems have become the secret ingredient that you will need to turn this flimsy argument into a multi-billion dollar rival to the outdated and inefficient incumbent. So, it's time to learn how many works to find out why these technologies win every single time.
This week's video is sponsored by ODU. Whether you ever thought about starting a new business or improving an existing one, ODU is the all-in-one business management platform with a full suite of integrated apps that help small to medium-sized businesses handle sales, accounting, inventory, manufacturing, and more, all from one place. What makes ODU stand out is how flexible it is.
You only choose the apps you actually need, and everything connects seamlessly from CRM and sales to inventory and manufacturing, so your business stays organized as it grows. We use ODO's products ourselves and our how many works library is run completely on ODO and having everything inside a single platform makes it much easier to manage operations without juggling multiple tools. It is also very easy to use and highly customizable which makes it a good fit for businesses that want software that adapts to how they work instead of the other way around.
If you want to see how ODU can streamline your business, you can try it for free for 15 days with no credit card required and even keep one app free. Check it out using my link in the description. Okay, so step three is to make sure your new regulatory loophole leverages technology wherever it can.
And there are three reasons why this alone is so important. The first is that technology like user networks can scale much faster than handling the entire business yourself. Once you start exploiting a legal loophole, the clock is ticking before regulators catch up to you or lawmakers simply plug the gap.
Yeah, sure. None of these groups are famous for moving particularly fast, especially if you throw a few uh campaign contributions their way, but in this game, they are sort of like that killer snail. Get complacent for long enough, and they will end you.
If you had to individually build all of these decentralized schools, hire all of these teaching consultants, and on board all of the students, you wouldn't make it far enough through the rest of the game plan before the legal problems caught up with you. Technology enabled networks let you just build a system for everybody else to do the hard stuff at scale, letting you move much faster. The second benefit to just building the technology is that it is much cheaper in the long run.
It's better to let someone else worry about maintaining their pretend taxi or pretend hotel or pretend school. You just want to be a convenient middleman. The third benefit is that scalable technology is going to have a much easier time raising money from venture capitalists who are willing to make big gamles like this.
Developing your own school takes a lot of cash that may never get returned. And even if you can run a profitable business in such a strange market, those returns will be slower. The same amount of money spent building a platform that enables other people to build schools can theoretically scale as quickly as the servers can register new users.
So the potential for thousandx returns is greater, which is important to these venture capitalists who want to cover the losses from 999 similar businesses that didn't make it. So once you have found your loophole and raise money to build a piece of technology to exploit it quickly and efficiently, it's time for step four, which is to launch it. But the trick here is to be really careful about where you do that.
Certain cities, states, and countries are just way more chill about this sort of stuff than others. You want to shop around for a government that is the least likely to cause you problems for this first launch. Historically, places like Silicon Valley or Austin have been popular choices because they are generally more supportive of technology.
But these days, you shouldn't be afraid of looking further abroad. For Schooloolie, your best bet is probably going to be a small city with a terrible school board, underperforming students, and a state government amicable to home and charter teaching. Once you have selected a location or a handful of locations for your initial launch, step five is to do absolutely anything it takes to make these early rollouts massively successful to all stakeholders involved except for your shareholders.
For now, feel free to burn through investor funding to provide wildly subsidized services. Pay your gig teachers double what they could earn in a regular school. And also make sure the wider community appreciates your business as well.
Fund sporting events, support local charities, talk about all of the bureaucratic problems you are solving, the taxpayer money you are saving, and how great it is that Nowhere'sville, West Miss Alabama is beating the big cities by embracing the future. Now, ticking all these boxes will likely cost your business a lot of money. But really, this is just a marketing expense to buy some political ammunition down the road because step six is to repeat the formula everywhere.
Basically, you want to search low to high on cities by regulatory oversight and work your way down the list as quickly as possible. Some of these places will inevitably challenge you, but hopefully by this point, you have raised enough investor cash that you can drag the underfunded and understaffed local regulators through the court for years before it becomes a real problem. All the while you're gaining new users and contractors every single day.
Step seven is to become too big to nail. If you have scaled your business properly, by the time the courts have made any progress, you will be serving millions of users and employing, oh, sorry, I mean independently offering business opportunities to hundreds of thousands of contractors. Uber is now practically one of the largest employers in the world, even if it doesn't technically employ any of its drivers.
At this point, even if it was absolutely nailed in court for clearly violating rules around operating unregistered taxis, it's too late. Politicians will simply not allow that many people to suddenly show up as officially unemployed on their watch. If schoolie can offer the same opportunities to its uh homeschooling specialists, as well as sprinkle in a bit of won't someone please think of the children, then once it gets to a certain size, it's very unlikely that any politician will have the grit to challenge you.
Now, once you have all of these pieces in place, feel free to inshify your platform, squeeze those margins, and get to work paying back all of the investors that funded this process in the first place. In fact, a lot of those early venture capitalists will help guide you along this checklist because they do it all the time, and they know it's the best chance of them getting their money back. Now, it sounds pretty bad, right?
But just to mix things up a bit, it gets better. Sometimes this whole process is actually exactly what a market needs. The opposite side of regulatory arbitrage is regulatory capture.
And if anything, that can be even more damaging. This is where incumbent businesses intentionally layer on mountains of red tape and regulations that are extremely difficult for new market entrance to deal with and in extreme cases actually effectively outlaw competition altogether. For example, internet companies unironically use the first amendment to argue that they shouldn't be forced to share a market with competitors, which is a big reason why your internet is probably so bad today.
The treacherous old guard over at Micro actually made a really great video on this that I thought was genuinely worth a shout out. So, go and watch that video next to find out how that is even possible. And don't forget to like and subscribe to keep on learning how money works.
