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 do 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).

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.

Promising Examples of Skin in the Game Startups #

A few more:

Outcome-based healthcare: Companies like One Medical Seniors (formerly Iora Health) pioneered value-based care models where compensation is tied to patient outcomes rather than the number of procedures performed. If the patient keeps bouncing back into the office, that’s a failure, not a revenue strategy.

Performance-based marketing agencies: A cleaner version of the agency model is getting paid on attributable revenue instead of billable hours. If the campaign doesn’t move the numbers, the agency feels it too.

Chef by Proper Food: This meal delivery service lets you pay based on whether you liked the meal. If you don’t like it, you don’t pay. That’s real downside, not a survey in your inbox.

Cargo insurance innovations: Loadsure prices cargo insurance off the shipment that’s actually moving through the world, not just a stale historical average. That’s closer to the bet being made.

The Future of Business Models #

I don’t know if this becomes some grand shift, but I do think more companies will end up here. The internet made comparison cheap, and customers are better at spotting when a company is only pretending to be on their side.

In that world, having skin in the game is an advantage because it’s harder to fake. You’re either willing to get paid when the customer gets the result, or you’re not.

The standard playbook of manipulative marketing, planned obsolescence, and customer lock-in also seems a little more tired than it used to. There are more alternatives, and people are quicker to notice when the business model is working against them.

So if you’re starting a company, I’d at least ask where you’re willing to share downside instead of just talking about upside. That’s the whole thing.

Sometimes the interesting part isn’t the tech at all. It’s whether the company is finally forced onto the same side of the table as the customer.