November 15, 2019

Skin in the Game Startups

I don't like making predictions, but one prediction I do have is that many future big companies will be what I call “skin in the game startups” (you heard it here first).

Having skin in the game simply refers to sharing risk and rewards with a counterparty. In startupland, angel investors have skin in the game: they give money to founders to help them start a business in exchange for equity with the hope that the business will become more valuable in the future. The investor is sharing the risk of the company (by outlaying their money), and if the company does well the investor will eventually reap grand returns.

Skin in the game is great because it means incentives are aligned: if you do well, I do well. If I do well, you do well. It's a win-win.

What's a skin in the game startup?

There are a few examples of skin in the game startups, but one of my favourite examples are the education startups that have popped up recently utilizing income sharing agreements. There's a great Freakonomics podcast about these. The model is simple: once a student graduates from a school and gets a job, they share a portion of their salary for a specified period of time with the school they attended.

With the income sharing model, schools are incentivized to go a good job of preparing students for their jobs, and actually helping them get jobs. Isn't that how education is supposed to work?

What problems can it solve?

One issue that I've noticed with many large companies today is that there is no incentive to make sure their customers (or users) are happy. In some ways, it's almost like companies are at war with their users. Some classic examples are:

Ad tech companies: users aren't their customers, users are the product. Ad tech companies are, in a sense, at war with their users in order to serve their customers (who are advertisers) by getting more ads in front of people. Thus, the products tend to get worse and less flexible over time as the company tries to squeeze revenue out of users. As I like to say, users get used.

Health care companies: some health care businesses have no incentive to help patients get healthy. Without sick patients, they would go out of business. The best customers are repeat customers with insurance who stay chronically ill forever (or at least, they believe they're ill).

It can make phone calls, too

Consumer goods: a lot of consumer goods are designed to last for short periods of time so that you need to keep buying new versions of the same thing (planned obsolescence). Classic examples are cell phones, automobiles, televisions, etc. While in some cases there are incremental technological improvements, the latest iPhone is a good example of how innovation has slowed to the point where buying the latest phone isn't necessary (do you really need 3 cameras?).

Why now?

I think the timing is good for skin in the game startups because markets feel saturated. What's the difference to the end user between Instagram, Snapchat, and TikTok? Not much. You can get the same dopamine hit from any of these. When was the last time you got a useful message from someone on LinkedIn? I, for one, can't recall.

It's been a while since the incumbents were novel and useful for me.


© 2019 Brenden Matthews, some rights reserved.