StartUp Founders: The Monopsony Trap
Dear Reader,
There’s a trap founders love walking into (and often have to & should).
Chasing the dream customer, perfect partnership, frictionless growth channel. The massive logo that will change everything. You know you’ll do anything to win it, despite the risks. And you probably should….
Founders don’t care. Because the upside is real, and the belief that you can out execute the risk is what makes you a founder. Right?
But now you have to win it, at all costs. It’s been the opening sentence to your investor update for the past 6 months.
The trap isn’t taking these deals; it’s before that. It’s the gravitational pull of chasing them, the way they bend your roadmap, your team’s energy, your entire company narrative – doing whatever it takes to win the deal.
The platform example: Last weeks AI wrapper newsletter, built on the back of OpenAI. What happens when they change the API, adjust pricing, or build your product natively?
It’s the monopsony trap.
Monopsony: when one entity, a customer, a platform, a partner, or a supplier, controls your destiny. They dictate the terms, control the revenue, and own your future.
Do you want one Nestle, or 10 mid-sized businesses no one has heard of? Nestle. Obvi. The logo on the deck is insta-credibility, and you know you can leverage that logo exponentially.
FYI, the answer is 10 normal customers who like your product, pay their bills, and are manageable to service. But we’re founders. Our insane belief in our capability to execute and outrageous risk tolerance mean we’ll chase both. Sure.
It feels like a win. That landmark customer or partner. Easier to sell, fundraise, recruit….and the adrenaline of saying Nestle is a customer.
I know the reasons.
✅ They’re excited about your product.
✅ They have the size to make your ARR two commas.
✅ They have the distribution into new customers you need.
✅ They can scale you faster than you ever could alone.
✅ They will help you refine your product.
✅ They are not a customer, they are a partner.
Startups don’t just die when they get outcompeted.
They die when they get absorbed, controlled, or slowly squeezed out.
They die when one entity owns them.
This is monopsony power aka dependence.
MONOPOLY vs MONOPSONY:
Monopoly: One seller dominates all buyers. (control supply)
Think Shopify dominating e-comm or AWS controlling infra. They have the power to set the rules.
Monopsony: One buyer dominates all sellers. (control demand)
Developer relies solely on the App Store (platform). Startup whose revenue comes almost entirely from one company (customer). SaaS platform dependent on a single supplier for its raw materials (OpenAI) (supplier).
Simply put? The restaurant that now gets 35% of its volume from Postmates.
Monopolies drive competitors out of the market.
Monopsonies own suppliers, control demand, and dictate pricing.
TAKE THE DEAL:
Startup advice is easy when you have options. Founders rarely have options.
The TikTok founder telling you to make sure the investor is the right fit.
The right fit? Right now it’s whoever has cash and is willing to give it to you.
Don’t be dependent on one customer. Control your own destiny.
Fab advice. Useless you’re fighting to survive.
Its unarguable. Big logo on your customer list? Big name partnership?
Why wouldn’t you? It opens doors, pays bills, and fast-tracks credibility.
Walking into a monopsony isn’t a mistake, do it.
We know that; we know taking that big customer or signing that big partner is going to be a nightmare. We know we will be their outsourced dev shop, fighting to keep them happy so the opportunity is expanded, we can use them as a reference, and they don’t churn. We know that.
You should do it. Obviously. Well, you maybe shouldn’t, but you have to.
You take it thinking you have the agility, the speed, the control. You can pivot, adjust, and maneuver in ways they can’t. You think you have control.
And then one day, something changes. And when they turn, they don’t pivot. They roll over everything in their path.
Or, forget about them. The minute they don’t actually sign, the minute they don’t actually renew, the minute your other customers are getting second-tier service because of them…
So all of this to say, you have the amount of time it takes for the monster to turn, to get in, out, and not be dependent.
So as you take a monopsony deal, a deal you are taking no matter how massive the red flags, we both know you are praying you can leverage this fast enough to not get f’d.
THE PARTNERSHIP TRAP:
Every founder talks about the “one partner” offering to take them into their distribution channels… Why. Would. They. Do. That.
There is NO scenario where any vendor puts a startup in front or alongside them, ever, unless the benefit to them is exponential.
Partnerships are amazing, I happen to think it’s the most powerful way to build into a market and most founders think about it too late, it’s just about understanding where you stand in the relationship.
You don’t have to sell me on the partner model….
Grow fast. Faster than you can alone.
Until they don’t sign, or if they do, one day, they tweak the algorithm, remove API, introduce pricing tiers, replicate your product, change direction…
By the time you realize you’re in a monopsony, it’s too late.
This is how platforms, marketplaces, and major customers kill startups. Slowly, predictably, and completely.
This isn’t a new phenomenon. History is littered with startups that got played.
So…
You have exactly as long as it takes for the monster to awaken to do everything in your power to own the customer relationships, own distribution, own the moat, and not be entirely dependent on an entity that wouldn’t notice if you disappeared. Start now.
As always, if I can be of service, feel free to grab time.
LFG.
— James