stopped innovating. The bill came due two decades later as the American auto industry spiraled into bankruptcy and its market share plummeted from 75 percent in 1981 to 45 percent in 2012.
Innovation in the Auto Industry
According to the Gallup organization, American consumers view car salesman as dead last in honesty and ethics. Yet when Tesla provided consumers with a direct sales alternative, the rent seekers—the National Auto Dealers Association—turned its lobbyists loose on state legislatures, robbing consumers in North Carolina, New York and Texas of choice in the marketplace.
In these states it appears innovation be damned if it gets in the way of a rent seeker with a good lobbyist.
Much like Paypal, it’s likely that after forcing Tesla to win these state-by-state battles, the auto dealers will have found that they dealt themselves the losing hand.
Rent Seeking Is Bad for the Economy
Rent seeking strangles innovation in its crib. When companies are protected from competition, they have little incentive to cut costs or to pay attention to changing customer needs. The resources invested in rent seeking are a form of economic waste and reduce the wealth of the overall economy.
Schumpeter’s theory of creative destruction—that entry by entrepreneurs was the disruptive force that sustained economic growth even as it destroyed the value of established companies—didn’t take into account that countries with lots of rent-seeking activity (pick your favorite nation where bribes and corruption are the cost of doing business) or dominated by organized interest groups tend to be the economic losers. As rent-seeking becomes more attractive than innovation, the economy falls into decline.
Startups, investors and the public have done a poor job of calling out the politicians and regulators who use the words “innovation means jobs” while supporting rent seekers.
What Does This Mean for Startups?
In an existing market it’s clear who your competitors are. You compete for customers on performance, ease of use, or price. However, for startups creating a new market—one where either the product or service never existed before or the new option is radically more convenient for customers—the idea that rent seekers even exist may come as a shock. “Why would anyone not want a better x, y or z?” The answer is that if your startup threatens their jobs or profits, it doesn’t matter how much better life will be for consumers, students, etc. Well-organized incumbents will fight if they perceive a threat to the status quo.
As a result, disrupting the status quo in regulated market can be costly. On the other hand, being a private and small startup means you have less to lose when you challenge the incumbents.
If you’re a startup with a disruptive business model, here’s what you need to do:
Map the order of battle
- Laughing at the dinosaurs and saying, “They don’t get it” may put you out of business. Expect that existing organizations will defend their turf ferociously i.e. movie studios, telecom providers, teachers unions, etc.
- Understand who has political and regulator influence and where they operate
- Figure out an “under the radar” strategy which doesn’t attract incumbents lawsuits, regulations or laws when you have limited resources to fight back
Pick early markets where the rent seekers are weakest and scale
- For example, pick target markets with no national or state lobbying influence. i.e. Craigslist versus newspapers, Netflix versus video rental chains, Amazon versus bookstores, etc.
- Go after rapid scale of passionate consumers who value the disruption, i.e. Uber, Airbnb, Tesla
- Ally with some larger partners who see you as a way to break the incumbents lock on the market. i.e. Palantir and the intelligence agencies versus the Army and IBM’s i2, / Textron Systems Overwatch
Airbnb—Damn the Torpedoes, Full Speed Ahead
For example, Airbnb, thrives even though almost all of its “hosts” are not paying local motel/hotel taxes nor paying tax on their income, and many hosts are violating local zoning laws. Some investors and competitors may be concerned about regulatory risk and liability. Airbnb’s attitude seems to be “build the business until someone stops me, and change or comply with regulations later.” This is the same approach that allowed Amazon to ignore local sales taxes for the last two decades.
When you get customer scale and raise a large financing round, take the battle to the incumbents. Strategies at this stage include:
- Hire your own lobbyists
- Begin to build your own influence and political action groups
- Publicly shame the incumbents as rent seekers
- Use competition among governments to your advantage, eg, if New York or North Carolina don’t want Tesla, put the store in New Jersey, across the river from Manhattan, increasing New Jersey’s tax revenue
- Cut deals with the rent seekers. i.e. revenue/profit sharing, two-tier hiring, etc.
- Buy them out i.e. guaranteed lifetime employment
Lessons Learned
- Rent seekers are organizations that have lost the ability to innovate
- They look to the government to provide their defense against innovation
- Map the order of battle
- Pick early markets and scale
- With cash, take the battle to the incumbent
This post first appeared on Steve Blank’s blog on June 24, 2013, and is republished by permission.
