Institutionalized Disruption: The Rise of the Reformer Startup

Today’s startups are lobbying juggernauts. Before Uber, for example, it was pretty clear that a person using their car to pick up fares all day would be subject to local taxi cab regulation and licensing requirements. Today, Uber operates in hundreds of cities across the globe, often under a modified regulatory structure for “transportation network companies” or the like. Startups are leading reform efforts in other regulatory fields too: Bitcoin startups and financial regulation, Airbnb and hotel licensing, and crowdfunding startups and securities regulation. The business press has taken notice of these “business models that flout the law” with an expectation of regulatory accommodation (Economist, March 2015). In my paper, “Institutionalized Disruption”, I consider the political economy of these reformer startups.

I liken the political successes of Silicon Valley startups to the “bootleggers and Baptists” dynamic that Bruce Yandle used to explain Sunday closing laws. Bootleggers were the deep pockets with strong financial interests in limiting legal competition. But brazen special-interest legislation has political cost. So bootleggers formed an unlikely coalition with Baptists, who gave moral cover. Similarly, reformer startups mobilize a combination of deep financial resources and grassroots appeal. 

To play out the analogy, I start with the bootleggers (though the allusion to organized crime is admittedly overly pejorative). By one count, there are over 170 startups valued at $1 billion or more. Some examples are particularly dramatic. Though still privately held, Uber has hired over 7,000 employees, engaged high-profile political operatives, and raised billions in financing. Institutional investors - venture capital and the like - seem increasingly willing to bankroll aggressive reform efforts. Some observers frame these efforts as closing a "knowledge gap" - a failure of regulators to keep up with the times. But it's also plausible to see it as old-fashioned rent seeking of the type Yandle sought to explain.

Who are the Baptists?  What gives these reform efforts a patina of societal benefit? Or more precisely, in the framework of public-choice theory, what gives politicians cover in capitulating to unicorn lobbying? The messaging seems to occur at two different levels. 

First, there is a segment of the population that is evangelical about individual technologies or business models. They see in particular innovations the opportunity to transform economies, governments, and societies. For example, they see in Bitcoin a path to central bank obsolescence, and they see in the sharing economy a path to consumer empowerment. Their claims sometimes echo the grandiose of science fiction.

Second, there is a broader affinity for Silicon Valley as an American institution. Startups represent a way forward in a period of difficult economic transformation. Founders like Steve Jobs and Mark Zuckerberg are cultural icons. Tax policy, securities regulation, and local economic development policy have long sought to accommodate and promote the Silicon Valley model. Because of these powerful sentiments, the reformer startup can be bootlegger and Baptist all in one. 

I end on an optimistic note. We can't assume that every product of Silicon Valley is so transformative that regulators should just step aside. But public-choice theory predicts that incumbents - taxi companies, hotel conglomerates, and financial institutions, for example - will fight hard to preserve regulatory and licensing systems that prevent innovative competition. It may help our political economy if startups have some institutional heft and public sympathies aiding their efforts to break this inertia.

Abraham Cable is Professor at the University of California Hastings College of the Law.