The Black Swan Of Broken Business Models
If a company is in business and taking in hundreds of millions or billions in annual revenue, it must be built on functioning business and operating models. Unfortunately, that’s not the case, and we have a black swan event brewing. Thousands of business models are built on unsustainable assumptions and will struggle to survive the next 3 years.
Many more face changing market conditions that will reduce their spending on technology. Data teams will face shrinking budgets and fewer projects. However, if you understand the challenges that business and operating models will face over the next 2 years, you’ll realize the data team has opportunities to deliver solutions. We can offset some of these challenges and risks.
Access To Low-Cost Capital
The first bad assumption is the most talked about: access to free or low-cost money. Startups like Uber spent years running at a loss in the name of growth at all costs. The company exists due to VC and investor funding. Between 2013 and 2016, Uber raised billions in funding with no urgency to switch from growth to profitability. That changed after Uber went public in 2019.
Investors have pressured the company to provide a path to profitability and execute that plan. Early attempts have included buying other startups like Drizzly and Transplace. These acquisitions were only possible because Uber had access to cheap money.
In a tighter economy or monetary policy, Uber would have moved to profitability years ago, or they wouldn’t be in business today. I’m not picking on Uber. It’s a company I personally love, and I’ve used Uber for rides since 2011. My rider score is 4.95.
The amount I paid for rides in those early years was subsidized by VC funding. My cost should have been much higher. Thanks to Menlo, Jeff Bezos, Jay-Z, Google, and several other investors, I got to ride at a discount.
That funding is why Uber and thousands of other startups are in business today. However, access to cheap money has dried up for all except the hottest Generative AI startups. Many are having trouble raising funds, even at lower valuations. The longer interest rates stay high, the harder it will get for startups to operate at a loss. Most have 2024 targets for profitability, but I have seen more aspirational roadmaps than feasible ones.
The change is impacting big businesses, too. Many companies carry large debt loads on their balance sheets, and debt costs will rise dramatically as those come due. The names on that list will surprise you.
Verizon has $151 billion in long-term debt with only $104 billion in annual revenue. Verizon has $14.8 billion maturing in the next 12 months. High debt loads are common among wireless carriers. T-Mobile has $7.7 billion in short-term debt. T-Mobile’s interest expenses for Q2 2023 were $861 million, and Verizon’s were $1.29 billion.
The cost of maintaining that debt will rise significantly since much of it will be rolled over. Wireless carriers are stable businesses with assets to borrow against. There are much less stable businesses with a similar cost of capital increase coming. Last year’s thesis was that rates would stay high for a short time and drop sometime next year. It doesn’t look like that’s coming to pass, so refinancing debt will not be cheap.
Consumers are also being impacted by rising credit card interest rates. Most major banks report a slowdown in consumer spending, and US household debt is rising to record levels. The pie is shrinking at a time when companies need pricing power or spending growth to offset higher capital costs or support their path to profitability. Companies that thrived when money was cheap and abundant are in serious trouble if conditions remain tight through next year.
This is just the first type of broken business model. There are 2 more flying under the radar, and these hit closer to data science.