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 #

Here are a few examples of innovative business models that incorporate skin in the game principles:

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. Healthcare providers are incentivized to keep patients healthy, not just treat them when they’re sick.

Performance-based marketing agencies: Some digital marketing agencies are moving to models where they get paid based on the results they deliver rather than hourly rates. For example, they might take a percentage of increased revenue attributed to their campaigns instead of charging fixed fees.

Chef by Proper Food: This meal delivery service allows you to pay based on your satisfaction with meals. If you don’t like the meal, you don’t pay for it. This creates an incentive for the company to maintain quality and learn quickly from customer feedback.

Cargo insurance innovations: Companies like Loadsure are creating new insurance models where premiums are calculated based on real-time data and actual risk exposure rather than historical averages. The insurer shares in the efficiency gains from better risk management.

How to Build a Skin in the Game Startup #

If you’re interested in building a skin in the game startup, here are some principles to consider:

1. Align incentives: Your business model should create a direct connection between your success and your customers’ success.

2. Be transparent: Make it clear to customers how your incentives are aligned with theirs. Transparency builds trust.

3. Measure what matters: Define metrics that truly capture value creation for customers, not just outputs or activities.

4. Share risk meaningfully: Go beyond lip service—actually put your profits at risk when customers don’t get the outcomes they’re seeking.

5. Create feedback loops: Build systems that help you learn quickly when customers aren’t getting value, so you can adjust accordingly.

The Future of Business Models #

I believe we’re at the beginning of a fundamental shift in how businesses create and capture value. The internet has made information more accessible and markets more efficient, which means customers are increasingly able to judge companies based on the actual value they deliver.

In this environment, skin in the game startups have a competitive advantage. They can build deeper trust with customers, align their organizations more effectively around customer outcomes, and potentially capture more value in the long run by delivering more value.

The standard playbook of manipulative marketing, planned obsolescence, and customer lock-in is becoming less effective as consumers become more sophisticated and alternatives proliferate. Companies that directly tie their success to their customers’ success will be better positioned to thrive.

So if you’re thinking about starting a company, consider how you might incorporate skin in the game principles into your business model. Not only is it potentially a competitive advantage, but it’s also simply a more satisfying way to build a business—knowing that your success is genuinely tied to creating value for others.

The most powerful innovations often aren’t technological but rather involve rethinking the fundamental relationships between businesses and their customers. Skin in the game startups represent exactly this kind of innovation, and I’m excited to see how they evolve in the coming years.