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What to do when the government (effectively) shuts down your startup

Tradesports.com co-founder Ron Bernstein at his home in New Jersey.Tradesports.com co-founder Ron Bernstein at his home in New Jersey.
Tradesports.com co-founder Ron Bernstein at his home in New Jersey.Photograph by Mackenzie Stroh for Fortune

As any entrepreneur knows, failure is an inherent—and indeed likely—risk of the startup life. Let’s be honest: that’s one of the reasons we love it. The stakes are high and worth fighting for. We believe in what we’re doing and in the change that a new solution can accomplish. Call it “disruption or death.”

Yet being truly disruptive can be a double-edged sword. While the term is now a buzzword for success, in reality achieving “disruption” usually means that established companies lose business and basic assumptions about the way things can—or should—be done are challenged. Many people just don’t like change. So if you’re the one doing the disrupting, you’re almost guaranteed to catch the attention of the folks whose job it is to control how things work: government legislators and regulators.

The attention is often not a net positive. I learned that lesson the hard way when Intrade, the company I co-founded and which served as a “prediction market” for real-world events, became the go-to source for journalists covering the 2012 elections. The hype attached to the data we created went mainstream, cited by the press almost every night until the elections. That led to regulatory scrutiny and then a letter from the Commodity Futures Trading Commission (CFTC).

Of course, it’s fair for the government to analyze new businesses and ideas. But they don’t, and often can’t, approach the issue with a fully informed perspective that includes the potential of new technologies—only the short-term implications. Consider the Supreme Court’s recent ruling against Aereo and the resulting outcry of leaders in the tech community.

Even as we transition into a more technologically progressive society, there’s no question: regulation will continue to challenge founders’ dreams, the companies they create, and the innovation they bring. So if you’re a founder that’s launching something likely to be examined, you need to ask yourself: Are you at risk of regulation?

I am deadly serious when I tell you to be damn well prepared if you are creating a business that will truly challenge the status quo. Being targeted by the government isn’t pretty. Closing Intrade down in the months after that letter from the CFTC was one of the most unpleasant things I’ve ever had to do.

No one, including Intrade, starts off planning to challenge the law. Rather, they try to conform and abide. But that’s not always enough. I hope that my story can serve as a lesson for anyone who might face the same government scrutiny.

The Rise and Fall of Intrade

I was a commodities trader in New York for 17 years before I formed the Intrade founding team in 1999. We established the company in Ireland with the goal of providing a new way for people to predict and share their wisdom about the future with each other, and to make money when doing it accurately. At first, we were focused on sports predictions. Ironically, regulations would later change and force us to drop sports from Intrade—and then would change again (very recently) to offer me a lifeline for prediction markets in Tradesports.com. But more about that later.

By 2002, a few years after we initially launched, it was clear that the concept had delivered on its potential. I decided to take a step back from day-to-day leadership and return to the U.S. My good friend John Delaney, previously our vice president of finance, stepped in as CEO. Under John’s guidance, we would expand from sports into other areas, become a hugely popular destination with over 50 million monthly page-views and establish Intrade as the leading provider of crowd-sourced prediction data.

After John’s inexplicable and tragic death near the summit of Mount Everest in 2011 (chronicled in a Fortune story called “The Mysterious Life and Death of Intrade’s CEO”), Intrade was left in disarray. We appointed a temporary CEO after John’s death, but the interim team encountered a wealth of problems from the start. John was a great leader, but he was fiercely independent and had his own operating style. It was hard to pick up on what was going on without John’s mental “maps” and business plans. A lot of important things were never documented.

Perhaps Intrade could have recovered from John’s loss in time. But a few months later, the other shoe dropped: a “greeting card” from the CFTC.

We had heard from the CFTC before, in 2005, and at that time had worked with the regulators to clarify our business and reach an agreement about how we could conduct operations. In November 2012, the CFTC accused us of violating that agreement. Unfortunately, with the limited records we were able to reconstruct, it’s hard to know what factors brought renewed regulatory attention to Intrade. My best guess is there was confusion or ignorance internally and externally about quickly changing regulations, especially across different territories. Acting as an Irish company with a global customer base, there was no common rulebook for us to follow.

It didn’t take long to realize we were in hot water. Already reeling after John’s passing, the CFTC now had us all worried about simply surviving. I knew I would have to make some hard decisions to keep our company alive.

You’ve heard about removing unhealthy branches from a tree so that it can survive and grow in new directions? This is similar to what you’ll have to do to keep your business running if the government targets you. You have to prune to survive.

We didn’t agree with all of the CFTC’s accusations, of course (and continue to defend against some of them today). But the writing was on the wall, and I knew our only chance for long term survival was to do what was necessary: close our U.S. business, cut costs, figure things out and only then try to find a way to re-approach prediction markets. But cutting costs meant losing employees and any remaining momentum.

I determined at the outset to be completely transparent with our staff. We couldn’t afford to pay everyone, but we also couldn’t afford to lose all of our talent. Those essential to the operation of the business would stay, but those who were not would have to be let go or work on a part-time basis. It was hard. But all were able to find positions at other companies. Choosing to be transparent and brutally honest was one of the smartest “investments” I made for the company’s future. It was clear we would be in it together as a team, one way or another.

But all that wasn’t enough. Without our large customer base in the U.S., web traffic dwindled. Despite its popularity, Intrade was dying.

The legal system is extremely difficult to deal with, especially for a startup. We couldn’t afford to hire teams of lobbyists and law firms. And even if we could have, winning the first battle would probably have been just the beginning of a lengthy process that includes lawyers, appeals, and more. Not only is it costly, but it’s also very distracting.

So what’s a startup to do? Well, my answer was to follow a common entrepreneurial refrain: do it yourself. While there’s definitely a level of expertise required to navigate our legislative system, it’s not so high that a self-interested party can’t figure it out for himself.

That said, you won’t always have the ability to make up your own mind on whether or not to hire a lawyer. In certain situations, you are required by law to retain legal counsel licensed to practice in the district in which your case is being heard—yet another example of how small companies suffer under our legal system.

Should you find yourself in court, be prepared for a long, extremely tedious process. You’ll encounter long gaps of inaction and uncertainty, and often the littlest things can delay proceedings for months. The entire process is discouraging; it’s designed to be. While winning small concessions along the way feels good for a moment, eventually the reality will sink in and you’ll think about all of the money and time that’s been wasted. Legislators and regulators want you to feel stymied, disappointed and unwilling to try again. Your defeat is supposed to serve as a warning to anyone who might think of walking down the same road.

Ultimately, we couldn’t find a way to manage our ongoing litigation and regulatory issues while maintaining an effective business. Despite my best efforts, we decided to shut down Intrade in March 2013, planning to deal with all of this in turn and then do our best to come back—if we could.

Moving forward after closing Intrade was one of the hardest times of my life. I had just retaken a leadership role in order to fight for the company’s survival, our employees’ jobs, and the very idea of prediction markets as a public good. I had lost that battle. Intrade was no longer a social contributor. I had failed.

But here’s the thing. Failing only means you’ve lost your time, money and some of your mental health. If you are truly passionate, you never lose your vision. It’s the one thing no one can ever take away from you; the only way to lose your dream is to let go of it yourself.

What if it Happens to You?

Should you find your dream threatened by the government, the first thing you need to do is be honest with everyone:

Your employees: If you lie to your team, they won’t be there for you when you need them. We lost a lot of great people from Intrade – but maintaining good relationships with them let us tap into that source of expertise for my next venture: Tradesports.com.

Your adversaries. If you lie to your adversaries during litigation, you’ll only elongate the process. The fastest way to get our issues resolved was to help the CFTC understand everything about the situation, not just the numbers (this effort continues to today).

Yourself: If you lie to yourself, you are throwing reality out the door and making bad decisions to fix other bad decisions. Just be honest to yourself above all. Is your idea worth fighting for? Can you actually commit the time and money needed to try to keep a company alive? Do you need a lawyer or can you do it yourself?

If you’ve been honest with yourself and come out of the process still believing that you have an idea worth pursuing, your next step is obvious. Fight for it as hard and as smart as you can. Don’t rely on a lawyer to tell you where you fit in. Find that out for yourself. You’ll always have a better idea of what your technology can accomplish and which directions it can go.

And if you lose the battle, which may happen, make sure you don’t lose the war. Either find a way, or make a way. The fashionable word for this today is “pivot.” It’s a silly substitute for “adapt,” but it’s the right idea. At the same time as Intrade’s political and current events prediction markets were being declared illegal, fantasy sports were adapting to legislation that allowed them to operate real-money games. By researching and understanding that opportunity, we were able to turn back to prediction markets for sports, morphing Intrade’s basic principles into Tradesports.com and developing a new “disruptive” idea.

Keeping the Dream Alive

My saving grace has been my commitment to the social importance of prediction markets. I have always believed that incentivized, crowd-sourced prediction data has the potential to inform all of our decisions for the better. It may be impossible for me to ever get back to the level of success Intrade reached, but prediction markets deserve that chance. And I have a healthy appetite for that risk.

I was disappointed with our government after the experience with Intrade. Stifling an objective and transparent “voice of the crowd” seems crazy to me. Our small company was not allowed to survive because it didn’t fall into an easy-to-understand category, and because of the presumption that us “common folk” need protection from ourselves. I just don’t get it.

Yet I still believe the U.S. is the best country in which to live and work. We have a completely different entrepreneurial mindset than the rest of the world. Here it’s not just celebrities but also savvy business people and innovators who become highly respected and admired. The stories Americans love most are those that include both vision and perseverance. It’s not just about money (though that continues to hold up as one of the best ways of keeping score), but also creating real change and advancing into reality all that we can imagine—even if it may seem impossible.

That alone is worth fighting for.

Ron Bernstein is the co-founder of Intrade and Tradesports.com