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The SportsFolio Journal - April 29, 2021
Forks In the Road: Choices Innovators Make
That was the guidance offered by legal counsel. The timing was either impeccable or horrible depending on your view of the world.
A few hours later, the Sports Illustrated writer was on the phone. He sorted through the final edits and apparently he had the green light to run the story he was working on for a long time. The story of a novel sports trading exchange. The story of how the way was being paved for sports investing. The story of AllSportsMarket (ASM).
It was one of those forks in life where you felt the decision was of utmost importance. Do I marry this person? Do I take this job? Do I move to this place? Turn left, and you are on the cover of Sports Illustrated but you are ignoring counsel’s advice. Turn right and the biggest press opportunity for your business is gone. Just like there may never be another Super Bowl in sight if you are a player, there is no guarantee that you will ever be covered by another major publisher.
Chris turned right. It felt like the right thing to do …
To be clear, that’s generally not how innovation in corporate America works today. Quite the opposite. Matt Levine is explaining the choice:
At some general, annoying level, following the law is a low-variance strategy, while ignoring it is a high-variance strategy. If you construct a comic-book supervillain lair and build a mind-control ray as part of a plot to take over the world, then there is a chance that you will either (1) rule the world, which is very good, or (2) be captured in a military raid and imprisoned in an impregnable island fortress, which is very bad. If you don’t do that, you cut off those tails of the distribution.
More prosaically, if you want to build a global taxi service that people can hail from a smartphone app, one way to do it is to coordinate with the taxi commissions of hundreds of cities to get regulatory approvals and make sure that you comply with local requirements, and another way to do it is to completely ignore those regulations and just launch your app everywhere. The second approach might expose you to ruinous fines or shutdown orders or bad publicity or prison, but it also might work; you might end up so popular in so many places that the local regulators can’t ban you and will have to accept your proposed terms. This is sometimes called “regulatory entrepreneurship.” The first approach can’t work that well; it will be slow and expensive and subject you to lots of different restrictions on your service. But it can’t work that badly, either; it cuts the “prison” tail off the distribution.
The global taxi service, of course, is Uber. Its history is fairly well-known, but in case you want to read a book about it, Super Pumped is pretty good. Also, a hat tip to Mike Levine for the Regulatory Entrepreneurship paper, here. Here is the first paragraph of the paper abstract:
This Article examines what we term “regulatory entrepreneurship”— pursuing a line of business in which changing the law is a significant part of the business plan. Regulatory entrepreneurship is not new, but it has become increasingly salient in recent years as companies from Airbnb to Tesla, and from DraftKings to Uber, have become agents of legal change. We document the tactics that companies have employed, including operating in legal gray areas, growing “too big to ban,” and mobilizing users for political support. Further, we theorize the business and law related factors that foster regulatory entrepreneurship. Well-funded, scalable, and highly connected startup businesses with mass appeal have advantages, especially when they target state and local laws and litigate them in the political sphere instead of in court.
Ok. Now we see DraftKings next to Uber. By the way, did you know that the same person, Bradley Tusk, was a political consultant for both FanDuel, DraftKing’s archrival, and Uber? Here is a profile on him. Here’s another. He has also written a book on saving startups from the death of politics.
When there is a fork in the road for a startup, Bradley Tusk is the type of person who advises that you turn left …
It was March 4, 2016. DePaul Law Review was hosting an event and the topic was daily fantasy sports. The panelists were the usual suspects: Daniel Wallach, sports gambling attorney, Marc Edelman, who is a sports law professor at the Zicklin School of Business (Baruch College) and Dan Werly, now general counsel for the Tennessee Titans, among others.
At some point, the discussion, unsurprisingly, turned to whether or not DraftKings was acting responsibly given the legal uncertainty of its operations. It wasn’t a public company then, but it was considering going public. Marc Edelman took issue with that. He would later publish a paper and title it: “From ‘Too Small To Notice’ To ‘Too Big To Fail’ – The Rapid Growth of Daily Fantasy Sports, and DFS Efforts To Change Illinois Gambling Laws”. He was prescient in his conclusion:
As of the date of publishing this article, both FanDuel and DraftKings, nevertheless, continue to operate their contests in Illinois despite Attorney General Lisa Madigan’s negative advisory opinion. Rather than act in a risk averse manner, the leadership of both FanDuel and DraftKings are all but daring the state of Illinois to bring a legal action against their companies. Perhaps, these companies truly believe that, if challenged, they will be able to convince a court that their contests fall within Illinois “bona fide contest” exception. Alternatively, with the strong backing from private equity firms and the professional sports leagues, legal advisors for FanDuel and DraftKings may simply believe their businesses are already “too big to fail.”
We know how that story ended, at least for now.
Later, Edelman, with his co-authors, published another paper about how DFS navigated operating in a grey area.
Dan Werly took a different approach and argued something along the lines of DFS companies having done the right thing, because if they didn’t, we wouldn’t be having this panel talking about them.
Same fork, different opinions. We don’t agree with Marc Edelman on everything, the main difference in our opinions being that we don’t think DFS is a game. That said, there is no question, in our minds at least, that Edelman is the type of person who advises that you turn right …
You know who else has turned left? Most crypto operators. Ripple Labs is a great example. We covered the story before, so if you want a refresher on the basics, this would be a good starting point.
It seems that Ripple Labs itself was uncertain about their creation and so they obtained legal advice. According to the SEC’s amended complaint, this is what happened:
Ripple engaged in this illegal securities offering from 2013 to the present, even though Ripple received legal advice as early as 2012 that under certain circumstances XRP could be considered an “investment contract” and therefore a security under the federal securities laws.
Ripple and Larsen ignored this advice and instead elected to assume the risk of initiating a large-scale distribution of XRP without registration.
The SEC complaint actually details this quite a bit, if you are interested, please read the complaint, items 51-60. The upshot is this:
Ripple Labs had its own fork in the road and decided to turn left …
The last chapter on this is far from being written, but this much we know: ASM is still fighting the good fight to make sports investing a reality across the globe. DraftKings is a publicly traded company. Tusk and Edelman can both be considered successful in their own right, but Tusk is likely sitting on a big pile of cash, with his Uber holding alone at one point estimated to be $100 million. Ripple Labs is now eyeing an IPO.
When there is a fork in the road, it seems turning right may not be the most profitable strategy, at least in the short term; yet, it is still the right thing to do.