Designed to defy the status quo: entrepreneurs as rule-breakers.

Founders and their companies often chart into novel territory to introduce business models that
bend or overtly defy legal constraints. This research work offers a foundation to think about and
reconcile these tensions.

What you need to know

Researchers David S. Lucas (Syracuse University), Caleb S. Fuller (Grove City College)
and Mark D. Packard (Florida Atlantic University) argue that what matters for entrepreneurs
and founders is not so much the letter of the law but the actual processes by which rules are
created, interpreted, and enforced by regulatory agencies, legislators, and courts.

In practice, legal constraints on doing business are often vaguely specified, subjectively
interpreted, and imperfectly applied. With this starting point, entrepreneurs often attend to what
is practically relevant as they evaluate the prospects of potentially disruptive venture concepts.
This means that the ways rules are interpreted and enforced in practice (rather than in theory) by
government and other entities can give rise to new ‘rule-breaking’ ventures that emerge when
rule enforcement is imperfect and/or when the interpretation of rules is unsettled.

What Did the Researchers Do?

David Lucas and co-authors develop the concept of a subjective lens of governance to describe
what makes for ‘breakable’ rule conditions in the law, via either imperfect enforcement and/or
differences in rule interpretation. The researchers argue that these two conditions can yield new
ventures that are either “black market” or “gray market” rule-breakers.

The researchers break down the socio-cognitive process by which entrepreneurs conceptualize
and initiate rule-breaking ventures, highlighting the importance of knowing “the right people” as
well as knowing “about the legal structure,”. They connect these aspects of knowledge to the
different motivations (e.g., moral opposition to a rule) that lead entrepreneurs to envision and
introduce businesses that either bend or break the rules.

The researchers explore and illustrate this conceptual framework via contrasting cases from three
rule-breaking startups: Zenefits, Square, and Aereo—each of which had a very different
experience with the legal system.

What Did the Researcher Find?

Zenefits, which is defined as a “black market” rule-breaker in the conceptual framework, grew
quickly as a B2B HR and insurance platform. However, repeated violations of licensing
compliance requirements brought many of this unicorn startups’ activities to a standstill and
resulted in leadership overhaul.

A contrasting case is found in Square, a fintech company specializing in mobile payment
offerings. Square exemplified successful “gray market” rule-breaking. Despite pushback from
several states’ regulators regarding the application of laws originally designated for money
transfers, the venture was able to elude these constraints and mobilize a growing customer base
to yield a favorable re-interpretation of these rules as irrelevant to their venture.

Finally, Aereo is a gray market rule breaker that experienced the opposite result from Square.
Aereo offered a novel way to provide customers with access to broadcast television without
network contracts. Regulatory challenges to its business model went all the way to the Supreme
Court, which ultimately decided against the venture. Overall, the three cases illustrate just how
complex and precarious entrepreneurs’ efforts are to grow ventures that run up against hurdles in
the legal system.

How can you use this research?

For entrepreneurs and founders, looking to disrupt established industries or simply to introduce
novel products and business models, the legal environment is often overlooked until it becomes a
significant hurdle, or in the worst-case scenario, “too late.” This research helps entrepreneurs
think about the relevant players both inside and outside of the government who influence the
processes of governance that will inform the new venture’s prospects for success.

Want to know more?

Contact: David S. Lucas (dlucas01@syr.edu)
Article citation: Lucas, D. S., Fuller, C. S., & Packard, M. D. (2022). Made to be broken? A
theory of regulatory governance and rule-breaking entrepreneurial action. Journal of Business
Venturing, 37(6), 106250.