03/17/2012 07:30 pm ET Updated May 17, 2012

Disrupting the Dinosaurs

Some problems are so big that no one wants to take them on. Fixing Social Security. Getting privacy settings right for your Facebook timeline. Gaining top position of your Foursquare leaderboard. #firstworldproblems, I know.

Sometimes, tackling big problems doesn't even lead to improvement. Look at the mess SOPA and PIPA created earlier this year. Regulation that prevents innovation is a tragedy.

One of the beauties of the start-up culture buzzing in Silicon Alley, Silicon Valley, and everywhere in between, is that smart, creative hackers are solving big, real-world problems. Rarely does a day go by when I don't hear about a start-up fixing something that needs to be fixed. (Though, for every "good" idea, there are easily 10 bad ones.)

What you don't see in the Valley or the Alley are many start-ups fixing problems in big, archaic, heavily regulated industries. Education. Utilities. Healthcare. Finance. Few people want to get involved -- and for good reason.

However, these industries are hungry for innovation.

Take healthcare, for example. Hospitals and doctor's offices around the country are weighing the costs and benefits of implementing electronic health records. It's almost comical how disorganized and inefficient the current system is. Yet, because of the regulation and risk involved (which translates to high cost in many cases), bringing records online isn't the no-brainer it should be.

Finance, unfortunately, is no different. In 2008, when I started Betterment, an accessible way to invest online, I faced a two-year uphill climb to appease industry regulators. One of the greatest challenges was that the industry was not designed for digital innovation. Features we wanted to incorporate into Betterment were so new that rules and laws about them did not yet exist. And, when you are the bootstrapped trailblazer in a regulated industry, you can't afford to incur any penalties along the way.

How do you mix the agile nature of a start-up with the slow rhythm of a regulated industry? If you want to disrupt the dinosaurs, you have to be creative -- and patient.

Here are four things I've learned, and my tips for creating productive change in regulated industries:

1) Be a diligent planner.
We all love a good pivot story. (Who doesn't smile thinking about the great pivot made 12 months ago?) For many start-ups, a pivot can be a terrific move. But, in a regulated industry, a pivot can be suicide. Pivoting in a regulated industry is more than just re-positioning the product and writing new code. There are many layers of legal work, regulatory research, and approvals that must be complete. When disrupting a regulated industry, detailed planning is a cornerstone. Don't pass go, don't collect $200, and don't write a line of code until you have considered multiple approaches and angles.

2) Network. A lot.
Often times, the people in the industry know the rules as well as the regulators. Attend industry events and conferences. Ask for introductions. Use LinkedIn. Talk to everyone. I've been graciously surprised by how many senior executives have spent hours of their time talking to me about Betterment, because they too see a need for innovation. Humans are programmed to want to help people -- use this to your advantage, and talk to as many people as possible. As a successful entrepreneur, you'll be able to pay this forward someday. And, as an added bonus: These folks will also be able to give feedback on your product (see tip #3).

3) Get user feedback early and often.
Every startup should do this. But, in a regulated industry, the stakes are higher. In a regulated industry, it is likely that your product involves some personal information -- whether it is information related to your health, employment, living situation, or, as in the case of Betterment, finances. Make sure you get feedback early on -- before building -- from potential users about your product. You need to make sure that the approach you are taking respects your users, and that you are building a product and a company that people will trust.

4) Know the rules, play by the rules.
Most likely, you can't afford to be the one making risky interpretations of the law for the industry you are disrupting. (Leave the risky interpretations to the big guys with deep pockets and extensive legal teams.) Instead, know the letter of the law and follow it. One of the best decisions I made in starting Betterment was to have a legal co-founder with years of experience in securities law. If you don't have the luxury of having a legal co-founder, make sure you have a legal industry expert on your board.

Disrupting the dinosaurs won't be easy, but there's a reason they're extinct. With a little innovation and a lot of determination, we can make the incumbents in these giant industries go the way of the dinosaurs. Happy hunting.