Editor’s note: We first ran this piece from Andy in July of last year. As he continues to scour the market for promising startups, he’s finding the lessons he learned then are still applicable today.
Dear Early Investor,
All businesses operate under the shadow of government supervision of some sort or another.
What a shame.
When I ran a global trade and financial company out of Southeast Asia, I was continually dogged by government rules… especially the U.S. Foreign Corrupt Practices Act.
It prohibited Americans from making payments to foreign officials to obtain or retain business.
I hated it.
My competitors used to leave BMWs in the driveways of government officials who approved projects worth hundreds of millions of dollars.
I couldn’t even take them out to lunch without asking my lawyer if it was okay. I’m not kidding.
Don’t get me wrong. I’m not for bribery. And I don’t enjoy giving away my own hard-earned money.
But I believe in fair competition, and this was anything but.
When Obedience Isn’t Best
You have three choices in cases such as these: Ignore the rules. Obey the rules. Or change the rules.
I chose to obey (with minor indiscretions here and there).
If I could do it all over again, I’d make a serious effort to drop or reform the rules. Why?
For one thing, they’re still on the books dogging a new generation of American businesspeople.
Our companies suffer unduly.
Powerful U.S. companies, armed with the best technology and products, have trouble defending their turf globally. They lose market share and revenue, and the U.S. ends up punching under its weight as a result.
But there’s something else going on here.
Some of the businesspeople (and their companies) I admire most are the ones who didn’t obey… who didn’t pull in their wings and “make do”… but who changed the rules that held them back.
I consider these people and their companies special.
As an early investor, I pay special attention to them.
Changing Crowdfunding Rules
One of my favorite examples is the team at Wefunder, a crowdfunding site we work closely with.
Wefunder’s three founders were telling Congress, the SEC and the White House to knock down the barriers to early investing long before crowdfunding rules were issued.
When I first talked to one of Wefunder’s co-founders, Mike Norman, he had just gotten off a plane from Peru. He spent the next 45 minutes telling me why equity crowdfunding was going to democratize startup investing and completely change how average Americans invest.
Nobody worked harder to lift many of the restrictions on early investing than these guys.
And they’ve worked just as hard – with just as much conviction – to make their crowdfunding site a success.
By the way, we recommended Wefunder to our members back in early 2014. It’s been performing extremely well.
Changing Healthcare Rules
Dr. Andrey Ostrovsky is one of the most accomplished guys I know. He was a practicing Harvard physician, a U.S. Senate health policy fellow, a World Health Organization data analyst and a clinical instructor at Harvard Medical School.
Need I go on? Okay, one more thing: He’s also a startup founder.
He thought our healthcare system stunk. So he decided to do something about it.
He published papers on healthcare redesign. And he did a congressional briefing on digital health.
Obamacare wasn’t his baby. But I’ve sat across the table from him as he ripped it open, examined its guts and told me what he saw.
What did he see?
A healthcare system that desperately needed the help of private-sector technology and entrepreneurship.
His tiny startup used advanced “predictive analytics” technology and proprietary algorithms to drastically reduce hospital readmissions. It was able to cut back readmissions by nearly 40%… an impressive achievement.
We recommended it to members of our premium research service in early 2015. It has since been bought out at a great price. Our members made out.
Changing Distillery Rules
Small distilleries in California used to operate under Draconian rules.
Consider just this one thing: Purchasing a bottle at a California distillery was illegal unless there was an on-site liquor store owned and operated by a third party.
State regulations completely hamstrung Arthur Hartunian’s big plans for his craft spirits distillery company.
Like Andrey Ostrovsky and Mike Norman, he decided to do something about it.
He became president of the California Artisanal Distillers Guild. Then, as president, he lobbied hard for the bill.
His efforts paid off. The “Craft Distillers Act of 2015” went into effect on January 1, 2016.
Napa Valley Distillery (NVD) is best known for creating Napa Vodka, a handcrafted vodka made with single vintage Napa Valley Sauvignon Blanc wine grapes. NVD provides tours, tastings and events on-site, and its consumer sales are taking off.
To take full advantage of the new rules, NVD will be expanding operations.
An Early Signal of Future Success
Not surprisingly, all three of these founders had a deep understanding of the new rules that governed their sectors. All three knew exactly how to position their startups to take full advantage.
But reasons for their success go deeper.
The new rules didn’t create their entrepreneurial success. Rather, it was their entrepreneurial drive and determination that created the new rules.
They brought the same entrepreneurial drive and determination to the startups they founded.
Changing the rules was simply the earliest manifestation of a very special breed of founders who get things done on their terms.
It’s in their DNA. And they bring that DNA to their companies.
Getting the government to change its rules is one of the earliest and best signals I know of future startup success.
Invest early and well,
Andy Gordon
Founder, Early Investing