Blogs & Comment

What it takes to build a business in a legal grey zone

Starting a company that may or may not be strictly legal can be a tremendous opportunity—or a nightmare

Airbnb cofounder and CEO Brian Chesky

Airbnb cofounder and CEO Brian Chesky speaks onstage at Vanity Fair’s “New Establishment” event in October 2014. (Kimberly White/Vanity Fair/Getty)

Years ago, I worked as a waitress at a popular independent brew pub with an origin story that was the stuff of local legend. The proprietor had bought a heritage building, outfitted it with expensive brewing equipment and hired a full-time brewmaster to develop premium ales and lagers. He had just one problem: It wasn’t yet legal for an establishment in Ontario to produce and sell its own beer on-site. He started the business anyway, shilling sandwiches and sodas until the law changed and allowed the pub to sell the suds that have made it a prosperous business for nearly 30 years.

It’s a heartwarming yarn, because it took a lot of guts and there was a happy ending. It’s a small-scale example of the kind of entrepreneurial derring-do that looks beyond the laws as they are and seeks out opportunity in the laws as they may be—a notion that has perhaps never been so celebrated as it is today.

Want proof? Look at the position of two of the most talked-about businesses of the past year: Uber and Airbnb. Uber has created real disruption in the staid taxi industry by providing a wildly popular app that, among other things, allows drivers to charge users for rides outside the taxi licensing system. Cab companies and governments the world over have cried foul, claiming the service violates the heavily regulated industry’s rules. Yet Uber seems undaunted. When hit with an indictment in South Korea at the end of December, CEO Travis Kalanick responded using the carefully calibrated language of a man who knows he’s exploiting a loophole: “We firmly believe that our service, which connects drivers and riders via an application, is not only legal in Korea, but that it is being welcomed and supported by consumers.” The numbers support him: Uber’s services are now available in more than 200 cities worldwide, and some analysts peg its value at US$40 billion.

Airbnb occupies a similar grey area. In connecting travellers with available houses and apartments, it’s created an affordable alternative to hotels that circumvents existing hospitality regulations. Again, the public at large isn’t bothered—more than 10 million people used Airbnb in 2014 alone, and the company now boasts more rooms than any hotel chain in the world.

Both companies have shown remarkable foresight in identifying excess capacity in the market and exploiting it in a way that really, really resonates with customers, regulations be damned. Such blue-sky thinking is enviable, even courageous. But before you start promoting whatever legally ambiguous pursuit you have in mind, you might want to remember that the success of Uber and Airbnb are the exception, not the rule. Just because each has achieved a critical mass of users does not mean that they can’t be wiped out of existence  by one knock of a judge’s gavel. That kind of uncertainty can have nasty consequences.

Consider Aereo, the Internet television startup that shut down in 2014, after just two years, when the U.S. Supreme Court declared its entire business model illegal. In Canada, the crowdfunded LineSix bus service—a private commuter shuttle offering an alternative to a particularly overtaxed Toronto transit line—shut down when it became apparent its service bucked municipal law.

Look at any category governed by heavy regulations—e-cigarettes, medical marijuana, drones, wireless services, even unpasteurized milk—and you’ll find a trail of failed also-rans for every company that’s still standing.

The hassle of fighting with lawmakers disrupts operations and distracts employees (and, for that matter, customers). It can also enact a very serious personal toll on the entrepreneurs hoping to dodge (or, God help them, change) the rules. Look to the tragic story of Aaron Swartz, the tech wunderkind whose 2013 suicide is thought to have been caused by the stress of fighting U.S. prosecutors over fraud charges. Not every case is so grave, of course. But as the Ubers of the world continue their seemingly limitless ascent, it’s worth noting that it takes a lot—financially, mentally and emotionally—to fight city hall, and the underdog doesn’t always win.