Cringe Worthy Business Models

C

There are certain movies I can’t watch. They make me cringe.  They make me want to reach through the TV and shake the main character.

For example, in Meet the Parents, why would Ben Stiller ever think it was a good idea to light up a cigarette on a roof and then flick it carelessly away? Why Ben, why? Common sense tells us this is a terrible idea.

I’ve been having the same cringy (that’s a word, right?) feeling lately when I look at some of the business models getting significant amounts of funding.

Here are a few examples:

Example 1: A Credit Card Company For Startups

This company just raised $125 million in a third round of funding at over a $1B valuation.  The company claims to issue approval within 5 minutes and offer credit lines 10-20 times what other credit card companies will provide to startup businesses.

What could go wrong when your revenue is dependent on your startup customers receiving outside capital?

Example 2: Loans Secured by Startup Employee Stock

This $200M fund offers non-recourse debt, secured only by employee stock. No interest payments on the front end, no limits on how the cash can be spent, and a minimum loan size of $100K.

What could go wrong when your revenue is tied to the liquidation of a security that gets paid out last in an exit, and the current value of the security is tied to speculative valuations?

Example 3: Housing Inventory Risk

I don’t fully understand how this works, but to reduce friction from the home buying process, it looks like this company will buy your home from you (almost) sight unseen, and then flip it.  They are on track to purchase $2.5B worth of homes over the next year.

What could go wrong when your success is tied to whether or not housing prices remain stable or rise…

Concluding Thoughts:

These aren’t new business models.  Iterations of these have been around a long time.

However, I have a hard time getting comfortable with the risk profiles of these plays.  To me, there’s way too much reliance on everything continuing to go right vs. creating sustainable business models.

It’s like watching someone flick a cigarette into a burning pile of leaves on a roof and just waiting for chaos to ensue.

Have a great weekend everyone!

About the author

Danielle O'Rourke

Recovering Investor. Mom. Wife.

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Danielle O'Rourke

Recovering Investor. Mom. Wife.

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