There are a handful of companies that have an unbeatable advantage — the fiduciary moat.
In finance world, when you hire an advisor who is a fiduciary — he’s legally bound to put your financial interests ahead of his.
There are many paths to business success and financial models that go with it. You can make money directly from the end user or you can find an interested third party who’s interests you serve — advertisers, financiers, CIOs, employers are often the real customers while the end user is reduced to a metric.
We are seeing this play out as ad driven businesses compete with the likes of Apple and Amazon. In B2B, companies that sell primarily to the CIO and procurement are competing with the new age of SaaS players that are often selling direct to the line of business or even the individual user.
What makes companies like Apple and Amazon unique?
Apple’s business model relies almost entirely on revenue earned directly from the consumer. Even when you are buying 3rd party apps, you are buying them from Apple — and Apple ensures that they are safe, secure and work as advertised.
Amazon and Jeff Bezos are single mindedly focused on delivering value to the consumer — they too make their revenue and profits by selling directly to you. Recently, they have added other revenue sources like advertising but that is far from the dominant source of income.
Meanwhile, any company that earns its living primarily by charging some other third party — advertisers, brokers, etc. — is not a fiduciary. They may be incented to do the right thing for the consumer but at the end of the day they can often cut corners.
The Unbeatable Edge
As Apple enters markets like health and finance, they come in with the benefit of consumer’s trust. It shows in their business model and it shows in their product — even technology architecture.
For example, the credit card you store in your Apple Wallet is never visible to Apple. They are applying a similar approach to your health data in the newly announced health records on your iPhone. They don’t need to make money from the pharma companies or the hospitals. They serve your needs directly.
Since they make so much of their money from you by charging you for phones and additional apps and services, they don’t need to sell or even use your data for businesses that are not aligned with the end users.
Trillion Dollar SaaS Market
The massive shift to SaaS can be viewed from the technology lens of multitenancy and serverless but at the core of the move to SaaS is the ability for the end user or line of business to directly buy the apps it needs.
The legacy on premise vendors built products focused more on the needs of the CIO and the needs of the business were often poorly served. Companies like Salesforce and Workday sold directly to the line of business changing the game forever.
Netflix and TV
When viewed through the fiduciary lens, you realize why Netflix is so powerful — every person in the company is focused on delivering entertainment to you the subscriber. There are no advertisers and no cable company middlemen dictating what they think is good for the consumer.
An ad free business is not just great TV, it aligns incentives in unique ways that create a moat that’s hard to beat.
The Next Generation of Fiduciary Companies
As we look to the next generation of startups, here are some companies whose business model is well aligned with the end users.
- AirbBnB: makes money when both renter and host are happy over the long term. Unlike Expedia and Priceline, that serve some very large customers and have a somewhat transactional relationship with the consumer.
- Lyft and Uber: In the long run, the winners in this category will have to serve the consumers and drivers well. The rise of Lyft was enabled by Uber’s missteps on this alignment and how it treated its drivers.
- Wealthfront: With a transparent fee structure, and no under the cover fees, Wealthfront is to the younger generation what Vanguard was the last — one of the few financial services company that is truly honest and aligned with the users.
No business model is isolated from misuse and abuse. Even with the fiduciary model, companies are often putting someone else’s interest ahead of yours — their own. One could easily argue that the closed content ecosystem of Apple and Amazon Alexa are examples of the companies maximizing their own self-interest.
What should a founder do?
When you are starting a company and want to build something for the long term, take the time to think through who your actual customer is vs the user. The more aligned the person writing the check is with the needs of your end user the better.
And even when your business relies on advertising or a CIO or a procurement officer — build a culture of doing the right thing by the true end user. Companies that work as a fiduciary build lifetime moats that are hard to beat.
The best startups I have invested in or advised like ProsperWorks, Workato and Algolia are doing just that.