Build Something Extralegal

Building in grey areas is an edge.

Avichal Garg (founder of Electric Capital) wrote a great blog post in 2011 (linked on Hacker News) that reflects on the Y-Combinator motto “make something people want.” He titled it “‘Build something people want’ is not enough.” In it, he elucidates the idea of why timing is so essential; why you can’t just build something people want, you also have to ask “why now?”. Cycling through various companies—FourSquare, LinkedIn, YouTube, and Zynga—he explains how macro technological developments played a critical role in the success of these firms, even as they employed relatively generic ideas that had been tried before.

The heuristic applies to all early-stage technology companies (barring, perhaps, biotech and a few notable exceptions). Their primary advancement is seldom discovery of a new technology per se. Rather, they combine existing technologies and repurpose them in a profound way. Garg discusses how companies are often limited by this factor, and it impinges on or enables their success. We can consider this “the spectrum of accessible ideas” in any given moment.

The extent to which an idea relies on a discovery (or challenges the absence of mass adoption of the underlying technology, e.g. location based apps before phone GPS) is indicative of its accessibility.¹ To put it in concrete terms: consider Kiko versus SpaceX circa 2005. The former—which acknowledged in its YC application that “Google might crush us like ants” (it later did)—was building an online calendar application.² The latter was attempting to build low-cost rockets. One idea was considerably more accessible than the other.

The spectrum of accessible ideas is, primo, dependent on—as Howard Stark once put it—the technology of the time. Secondo, and to a far diminished extent, it hinges on what is legal. As such, build something extralegal.

Illegality is a spectrum, and doing something outright illegal (à la Ross Ulbricht) is not the goal (nor the meaning of this heuristic). Yet a better understanding of the range of it clarifies an otherwise blurred line. By that token we can conclude that building on the edge is an edge. Expanding your spectrum of accessible ideas naturally reduces your competition.

To actualize this, consider three categories:

1. Provocative

   1. Clearview AI scraped billions of images for facial recognition matching. Though not outright illegal per se, its product is unpopular and has resulted in numerous legal challenges.

   2. Juul launched flavored vapes in sleek packaging that proved immensely popular with teens, later prompting considerable backlash.

2. Extralegal

   1. Uber launched unlicensed taxi services.

   2. Airbnb launched a short term rental marketplace before cities explicitly allowed them.

   3. PayPal launched peer-to-peer payments before the rules surrounding internet money were written and later obtained banking licenses.

3. Unlawful

   1. Silk Road and AlphaBay sold drugs and arms on the dark web.

   2. Napster allowed for music pirating.

   3. Pirate Bay allowed users to access pirated films.

One category here clearly outperforms the others: extralegal. By building in a frontier space where regulations are still unclear, the founders gained an edge. VCs are willing to accompany founders in such efforts. To a certain extent, this also appears at large founder-operated companies willing to take considerable risk as well; Meta, like Open AI (allegedly), trained Llama on LibGen.

Peter Thiel has noted that he had a very brief window in which to build PayPal, one in which online peer-to-peer payments regulation had not caught up. To that end, part of this is timing, as Garg well notes. Another is being willing to just do things. In other words, take reasonable risk to expand the spectrum of accessible ideas.

1. Naturally, this has an effect on their defensibility. It also is often correlated with the prestige of a later-stage startup; by tackling hard tasks successfully, their founders and employees inevitably gather respect and awe.

2. Part of YC’s first batch, the founders, Justin Kan and Emmett Shear, would later pivot and found Twitch.