The Stealth Regulatory Arbitrage Unicorn

A cynical theory of startups claims that they succeed by evading laws. Airbnb is just an attempt to get around zoning, Uber is just forging taxi medallions, Juul is just making a nicotine delivery mechanism for people who need to hide cigarettes, Facebook is the new cigarette, and so on. All of these theories are very satisfying to people who are personally offended when somebody else gets rich, but they’re also usually untrue.

Airbnb was clearly inspired by couchsurfing, not by Hyatt. Uber’s management was shocked at how brazen Lyft’s ride-sharing was. Juul’s marketing relentlessly hammers home the point that this is a product for people who already legally smoke. (If you want to find a company that tried to target kids with nicotine, you might look into the one that, for a decade, marketed cigarettes with a cartoon character.)

Starting a business specifically to engage in regulatory arbitrage is rare, because most people don’t learn the legal limitations around an industry until they’re actually in it. When you look at an industry from the outside, you just see the status quo. There might be nothing you’d do different or a million things you’d do differently, but you don’t know until you dig in which of those things are not being done because doing them wouldn’t be legal.

What often happens is that a business starts out as a product idea, but grows because laws haven’t caught up to it yet. In many cases — disproportionately among the most successful companies — rapid growth means creating…