Loopholes at Amazon & co: A path to a successful business model?
Exploiting loopholes in the systems of tech giants can seem lucrative, but comes with a tremendous disruption risk. Without knowing about the pitfalls, investments in such business models are extremely risky.
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The people working for your target are clever. Very clever, actually. During an alumni meeting at TU Berlin the developers came up with a brilliant idea. Within a few weeks, the business concept came to fruition. Financing was a walk in the park. Now the start-up offers highly relevant insights based on data collected by Amazon — data which really should not be freely available to utilize by third parties. The team of your target has made it possible. Finding the loopholes became a unique selling point for your target.
This USP makes the company highly interesting to you. You love the team, its tech expertise and its “can do”-attitude. Based on the outstanding work and analysis from the team, rapid growth is expected. There is no doubt that the information the company can provide to customers is worth its weight in gold. You decide to make the investment.
A few months down the road, on a Tuesday morning, your phone rings. The CEO of the company is a messenger of bad news. During last night, he has received numerous calls from other software companies overseas that suddenly lost access to the data records that also your portfolio company utilized before. The CEO confirms, that your company, too, has lost access to all relevant data records. Out of nowhere, Amazon has changed its interfaces and caused disruption in the industry. Your portfolio company is facing immediate insolvency.
What happened? To put it quite simply: Tech giants attract the best skills in the industry. Amongst others in order to work on tasks like finding and closing loopholes. Chances are, loopholes are only temporary, especially when other companies use them to generate sales and attention. Therefore, a business model that uses loopholes in one of the really big players’ systems should ALWAYS ring your warning bells. Investing in these types of companies can be a massive deal but it could also backfire big time. Within the blink of an eye and at any given moment, the loss of access to the loophole could shake such a company to its very foundations.
It is not always easy for investors to assess and identify these types of dependencies that can threaten the very existence of a business model. A due diligence with a focus on “digital” can shed light on this topic. Part of that is to examine whether the business model is based on the exploitation of loopholes or based on official interfaces and licenses. Once identified, loopholes do not necessarily have to be a deal breaker for your investment. Subsequent licensing may be an option to save the business model. Of course it would make the use of the loophole official and therewith no longer free of charge. As such it would reduce the risk, but also your margins. In any case, when evaluating targets utilizing loopholes, it is recommended to include a prophylactic calculative licensing cost even if the data at the current time of assessment is free of charge to utilize.
Johannes is a digital expert, transaction consultant, passionate entrepreneur and triathlete in his private life. As Manager Transaction Services at wdp, he is the team lead for the commercial assessment, evaluation and development of digital companies. In his previous positions, he advised numerous clients from the digital and finance space at PwC and helped building a fintech-startup for a Cologne-based company builder.
