Do you think McDonald’s is a “fast food” restaurant? Well, they are not. Since 93% of all its locations are franchised, the company has a property portfolio worth $41.9 billion and generates almost all of its revenue from franchisees paying rent and licensing fees. McDonald’s is actually a real-estate company, and not a restaurant chain.
According to former McDonald’s CFO Harry J. Sonneborn, “We are not technically in the food business. We are in the real estate business. The only reason we sell [cheap] hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.”
Why startups dig moats
Much like the hidden narrative behind the McDonald’s business model, many technology companies we’ve come to appreciate for innovation, such as Uber, are not really tech companies in how they make money. Instead, it’s their ability to shape the competitive landscape through deft legal maneuvering, lobbying, advocacy, intellectual property, litigation, and a combination of “technically legal” tactics.
One of the world’s most prolific investors, Warren Buffett, once said that: “The most important thing in evaluating businesses is figuring out how big the moat is around the business”; with the “moat” being a company’s ability to maintain a competitive advantage.
Uber is a prime example of this phenomenon. Being a two-sided marketplace, a platform that brings together two groups of users, Uber’s value hinges on the scale of its network, not its software. The “moat,” however, is dug through a complex management system that employs legal tools and strategies to manipulate market forces.
Uber’s disruptive entrance into the transportation sector has led it into countless legal battles globally, with taxi drivers, labor unions, regulatory bodies, and even its drivers. Uber has spent considerable resources battling these legal issues and lobbying for advantageous policies. In fact, Uber’s success is due more to its prowess in these legal battles than it is to its ride-hailing app.
Uber’s strategy chiefly revolves around shaping the regulatory landscape in its favor. The company often enters new markets regardless of local taxi laws, sparking a rapid customer acquisition process.
Regulatory entrepreneurship
By the time legal complications arise, Uber is typically so entrenched in the local community that policymakers feel compelled to amend existing regulations rather than oust the service. This strategy, known as regulatory entrepreneurship, is a significant part of Uber’s business model.
Uber employs a fleet of lawyers to protect its assets, much like a traditional law firm. The legal disputes are not side effects of their operations; they are part and parcel of the core business model. In fact, I’d argue that since Uber’s success is chiefly due to legal prowess, its lawyers are the stars and the other employees are merely non-lawyers employed by a law firm.
So, when you hail an Uber, it may seem like you’re using a tech platform to summon a car. But in reality, you’re hailing one of the world’s largest and most sophisticated law firms that just happens to have an independent-contractor driver nearby.
This serves as a reminder that business models are often far more important than products and are deeply intertwined with a startup’s success. And when it comes to shaping regulations and using legal strategy to its advantage, few can dispute that Uber is indeed a law firm disguised as a tech company.
But Uber is far from the only company with a hidden business model.
Airbnb: is successful only because it battles housing and zoning laws across different jurisdictions, employing significant legal resources to navigate these frameworks.
Netflix: the bulk of what this video streaming company does is negotiating and managing a significant number of licensing deals across different countries, with various content providers, as well as navigating different regional content regulations.
DraftKings and FanDuel: These online betting companies only exist because they can navigate and shape a myriad legal complexities and regulatory compliance issues as gambling laws vary greatly by jurisdiction.
This is just a few of the hundreds of tech companies, much like Uber, which are successful because they own legal strategies to navigate complex regulatory environments, protect their assets, and maintain competitive advantages.
The message to immigrant founders
The pathway to success in the tech industry is often not about creating the next groundbreaking technology or designing the most user-friendly app. It’s about reshaping, redefining, and reinventing the landscape of the industry through resilience, adaptability, and strategic foresight.
As immigrants, you bring a unique perspective, diverse experiences, and a resilience born of embarking on a journey to new lands and unfamiliar territories.
You understand more than anyone else that navigating uncharted territory often means understanding and influencing the rules of the game, sometimes even rewriting them.
Most importantly, when you enter the U.S. market don’t only compare your products to those sold by other startups, but rather to the business models currently used. Whether you are really a secret law firm or real estate company, or anything else, keep in mind that your moat needs to be as wide and deep as you can make it.
About the author
Michael Burtov is a serial venture-backed entrepreneur who has grown multiple startups from initial ideas to millions in revenue and venture funding. He has appeared on Shark Tank and his work has been covered in hundreds of major media outlets. He is also the subject of mini-documentaries by Discovery Channel and CNN’s “Great Big Story.” Additionally, Michael has worked with hundreds of high-growth startups to scale and fundraise, directly and through his involvement with leading innovation organizations including Harvard Business School, Harvard Innovation Labs, and the MIT Enterprise Forum. He is also the author of “The Evergreen Startup,” a popular book on early-stage startup fundraising. He holds multiple patents and has received several awards for his work, including the Edison Universe Edison Award, the TIME Magazine Best Inventions Award, The Business Journals Top Inventor Award, Brandeis University Alumni Entrepreneur Award, and the TechCrunch Disrupt Wildcard Award.
