Brad Hargreaves | Building Things

Brad Hargreaves on entrepreneurship, community and life

The Uncertainty Plague

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I had the opportunity to spend Thanksgiving week in Costa Rica, which was a welcome change in scenery from Manhattan. I’m not much for hanging out at the beach, so I found some time to talk to a few people involved in Costa Rican real estate and finance while I was traveling around the country. I was particularly curious about the startup community, which seemed to be totally absent throughout the country.

The difficulty I heard from everyone in Costa Rica was the same: while the country is one of the world’s oldest democracies and most stable Latin American nations, its legal system is frustratingly unfair and unpredictable. Property laws are Byzantine, and squatters have powerful — albeit vague — rights. Costa Rican citizens are explicitly favored in all legal disputes. Tax law is complicated and seems to be made up as you go along. Despite Costa Rica being the most developed country in Latin America, the uncertainty injected into the system by needless legal complications has made technology innovation extremely difficult.

Reports of the United States’ death as the startup capital of the world are greatly exaggerated. Our embarrassing lack of startup visas, bureaucratic burdens and high cost of labor are small inconveniences in comparison to the quality of the States’s legal system, which is largely fair and — most importantly — consistent. In the United States, I have a pretty good idea of what will happen in almost any legal situation. If my company goes bankrupt, there are centuries of precedent governing what creditors can and cannot do. If I want to sue someone, I know the costs and risks. Insurance is available for everything imaginable — mostly because our legal system is so sound.

Consistency is the most underappreciated driver of success in a product or service. This isn’t just about legal structures. Great brands are built through the delivery of consistent and predictable experiences as much as PR, pricing and growth strategy. As a consumer, Apple, Starbucks, Wal-Mart, McDonald’s and dozens of other successful brands will each give me exactly what I’m expecting to get from them. I simply don’t have to worry about the risk of getting something different or unexpected. Humans are naturally risk-averse creatures, and we’d much rather take something guaranteed than something that might be 25% better or 25% worse.

By removing the uncertainty around business law, the state of Delaware has prospered, generating over $750 million in revenue in 2009 from corporate services alone. The majority of entrepreneurs I know send Delaware a sizable check every year for doing nothing other than having less uncertainty around corporate law than other states — and anywhere else in the world. If this isn’t an example of a brilliant hack, I’m not sure what is. For doing something without any fundamental cost — providing a consistent legal framework — Delaware has created a massively successful business.

Ironically, having a stable, un-disruptable legal system around our entrepreneurs gives them the power to disrupt industries and aging business models. Until other countries develop the kind of legal infrastructure that will give innovators the certainty to know that their creations and profits are protected from corrupt officials, greedy politicians, populists and nativists, the United States will continue to produce and host the vast majority of innovative, billion-dollar companies and entrepreneurs.

Written by Brad Hargreaves

November 28th, 2010 at 6:43 pm

  • http://twitter.com/nickgiglia Nick Giglia

    Interesting perspectives, my friend. It seems like you’ve hit on almost a startup version of Maslow’s Hierarchy of Needs….If I’m not confident that the system will do right by me in all outcomes, then I feel far less comfortable starting a company or taking risks. nnThanks for the separate view of things – it’s so easy to get caught up in what’s wrong with our current situation that we forget all that’s so very right about it.

  • http://www.vonkoeller.de Magnus von Koeller

    Interesting perspective — and I agree with you when it comes to the importance of a stable and predictable legal framework. Without it, entrepreneurship is made all but impossible. However, I would argue a different point: the US should be careful not to lose its edge given an increasingly unpredictable legal framework. This applies to both civil and criminal law.nnFirst, civil law: lawsuits are so unpredictable and take so long that they can basically be used as legalized extortion. Take the Facebook / ConnectU lawsuit. Regardless of the merits of the case, Facebook was forced to settle simply out of concern for the bad publicity of the case. Or take the smartphone industry: Microsoft uses its patent portfolio to basically impose a price on Android — supposedly free — just by suing everybody who builds Android handsets over patent issues. Again, regardless of the merits of the case many handset makers prefer to settle than fight just based on the uncertainty of legal proceedings. I guarantee you that your product violates somebody’s patent — it’s only a matter of time (and success) before you are sued.nnCriminal law in the US is almost worse. There are so many criminal offenses, many of them highly obscure, that almost everybody is guilty of something. This gives prosecutors an incredible amount of leverage as they decide which cases to pursue and whom to leave alone. The Economist published a very interesting article on this topic. Their first example: somebody who imported lobster tails in plastic bags rather than cardboard boxes, in violation of a Honduran regulation that Honduras no longer enforces. They got eight years behind bars for this. nnNow, tell me again about how great America’s predictable legal system is. Sure, compared to a third-world country it looks great. But that isn’t exactly saying a lot and it should be no reason to comfortably lean back and say “we’re fine”. Quite on the contrary, a predictable sensible legal system is a great asset that America should fight to rebuild.

  • http://www.vonkoeller.de Magnus von Koeller

    And just to make my point, Facebook being sued over a patent that protects any sort of privacy control: On Techcrunch