Platform businesses and regulation: can startups change the rules?

Andrew Roy

Sep 22

5 min read

A founder sees a market that is expensive, fragmented or difficult to use. Buyers and suppliers already exist, and an online platform could make it easier for them to find each other, transact and build trust. The difficulty is that the proposed business does not fit comfortably within the existing rules.

Airbnb and Uber are familiar reference points for this kind of ambition. Their histories should not be reduced to a single formula, but the opportunity they suggest is appealing: build something people want, grow quickly, and help change the rules governing the market.

It’s an approach I see regularly with my startup clients, and I think there is still room for it. To be successful, however, the business plan needs to explain why the rules can change and how the company will reach a workable position.

The platform’s value needs to survive regulation

The value of a platform starts with what it makes possible. It might help customers find a service that was previously hard to locate, make transactions more reliable, or bring underused resources into the market. The OECD’s research on platforms identifies reduced search and transaction costs, trust and network effects as important parts of their economics.

Those advantages can survive regulation. A service that saves customers time and gives suppliers better access to demand may remain attractive after licensing, reporting or insurance costs are included. That is a completely different proposition from a business whose appeal depends heavily on avoiding costs that its competitors must bear.

For a founder or investor, this distinction deserves attention early. The economic case needs to account for customer demand, supplier participation and margins under a plausible regulatory framework. Some changes may leave a useful business intact; others may remove the features that made it viable.

That assessment need not assume every existing rule will remain in place. Some ventures are worth pursuing precisely because they offer a better way to organise a market and a persuasive case for changing its rules.

Building support for regulatory change

Legal scholars Elizabeth Pollman and Jordan M. Barry describe this as regulatory entrepreneurship: changing the legal environment forms a substantial part of the business plan. Growth can support that effort. Customers may become advocates, suppliers may depend on the new source of business, and revenue or investment may help fund the work needed to secure change.

That is a serious commercial strategy, but it also means the founder has to understand who can change the relevant rule, what would persuade them, and who may oppose the change. Evidence that customers like a service helps, but the interests of people affected by the service also matter.

For growth to help change a rule, support needs to reach the people who can change it. Users who rely on a service for their income or daily lives may have a stronger reason to defend it than occasional customers. Their location matters too. A large customer base spread across many markets may offer less support in a particular city or province than the headline numbers suggest.

Growth can also strengthen opposition. If a service creates problems for people outside the transaction, expanding it may give those people more reason to demand restrictions. The case for change becomes stronger when the company can explain those effects and show how its proposed model addresses them.

Liability and the limits of user contracts

Allocating responsibility to users also needs to work in practice. The obligation to comply, exposure to a claim and the cost of a loss are different things. Contractual protection depends on enforceability and how the business actually operates, while some duties may still fall directly on the company. B.C.’s short-term rental law, for example, puts registration-checking duties on platforms themselves.

Even where a reimbursement clause is enforceable, it may offer little commercial protection if the user has neither sufficient assets nor applicable insurance. Shifting exposure can also change participation. If hosts, drivers or sellers face penalties they cannot bear, the platform may lose the supply its growth depends on.

Enforcement, penalties and timing

The consequences can change the whole calculation. A fine the company can absorb presents a different risk from accumulating daily penalties or an order stopping operations. Depending on the applicable law, exposure may also extend personally to founders or executives and may include imprisonment. These outcomes need to be distinguished from ordinary licence fees. The existence of a financial penalty does not establish that the company can pay and continue.

Uber’s early experience illustrates the distinction. In December 2015, the City of Calgary reported that Uber had agreed to keep its operations suspended while a temporary injunction remained in effect. The consequence included losing the ability to serve that market while the regulatory position was being resolved.

The timing is just as important. A plan to build support over two years is fragile if the company cannot survive an interruption next month. The ability to continue operating during a dispute and the money available to fund a delay are therefore central to the growth plan.

That is the practical significance of whether regulators have “caught up”. Where enforcement can interrupt the disputed activity before meaningful support develops, the company has less opportunity to turn growth into influence. A plan that depends on a slow response needs a sound basis for that assumption.

Funding and political capital

The amount of money behind the company matters, but so does who is providing it. Capital committed to a successful launch may be insufficient for a prolonged dispute, delayed revenue or a change in the business model. The investors’ capacity and willingness to fund that longer effort become part of the strategy.

Some backers may also bring political capital: relevant relationships, credibility with decision-makers, and experience presenting a case for change. That can help a company understand the process and get its proposal heard. Those relationships need to matter in the relevant jurisdiction, and the investors need to be willing to use them. A prominent name on the investor list is not enough to establish either.

Making the proposed change concrete

The proposed change also needs to be concrete. “The rules are outdated” leaves a decision-maker with a problem to solve. A founder should be able to explain what should replace them, how the new approach would address the concerns behind them, and why the resulting market would work better.

For investors, progress on that issue belongs alongside customer growth in the investment case. Expansion is more valuable when it is accompanied by a clearer basis for continued operation. A narrower permitted service may still be worth building, provided enough demand, supply and margin remain.

I think there is still room for companies to pursue that opportunity. A useful platform can give people a reason to support a different way of organising a market. The strongest version of the strategy builds demand and the case for change together, with a clear view of who carries the risk, what an adverse decision could do, and whether the company and its backers can see the process through.

If you are developing a platform business, contact Roy Legal to discuss the rules affecting the business and how they fit into your launch or growth plans.

This article provides general information only and is not legal advice. Reading or relying on it does not create a solicitor-client relationship with Andrew Roy or Roy Legal. Laws and their interpretation may change, and their application depends on the circumstances. Obtain legal advice about your specific situation before acting on this information.