Got a Good Idea? Let Your Customers Fund Your Start-up!

While "entrepreneur" may occasionally be a euphemism for "out of work," there are more and more individuals working in earnest to start a business of their own. Indeed, statistics show no fewer than 400 million such individuals globally, with over 20 million in the US and 2 million in the UK. Sadly, many of these ventures will never get off the ground at all. Of those that do, the majority will fail. Of those who submit business plans to venture capital investors, less than one percent will get the money they seek. Those elite few who do raise money give away large portions of their company and control in return. Many founders who accept VC money are fired within a year after the investment.

Despite the challenge of raising money, and the serious potential downsides, there is a widespread notion that for an entrepreneur to build a high potential business, s/he needs to write a business plan, raise a few million dollars, drink a lot of coffee, and just wait to get rich. But this vision is essentially wrong. Many companies that have grown successfully never raised any venture capital. So why are we so focused on raising money, putting the investor at the center of this entrepreneurial phenomenon? The customer is the focus of any successful business, not the investor, or even the entrepreneur!

There are numerous examples of large, successful companies that have grown using their customers' cash, like Airbnb, Banana Republic, and Dell. They may have raised money, but they did it later, once the business model was proven and generating revenue. Those conditions make it easier to attract funding, giving the entrepreneur a lot more control over the terms of the deal.

So, there are a lot of reasons why not to raise capital early and use customer funding instead. "OK, but how?" you ask.

Five Ways to Build a Customer Funded Business
There are five different types of customer funded models - each surprisingly familiar - that creative founders use to get their customers to fund their start-ups.

Customer Funded Business Models - Five Types
What is most striking about these models is that each gives the company what accountants call negative working capital. That is, the company has customers' cash in hand before having to produce or pay for the good (or service) it sells.

A Customer Funded Model That Has Worked - Airbnb
Airbnb got its start in 2007, when founders Joe Gebbia and Brian Chesky noticed that San Francisco hotels were sold out for a big design conference. "Why not give conference-goers a more personal experience than they would get in a hotel," thought the duo. So they rented airbeds on their floor, along with breakfast and local hospitality, to some intrepid conference-goers. Two air mattresses and a thousand dollars later, they were in business. The concept soon expanded - "Why only conferences?" - and took off after the business got noticed during the Democratic National Convention in Denver in 2008.

Matchmaker models rarely need much cash, so getting started is often easy, especially if you bring in someone who can write code and develop a website, as the Airbnb founders did, adding techie Nathan Blecharczyk to the team. Fast forwarding to 2013, Airbnb has raised some $120 million in funding from blue-chip VCs, and lists over 200,000 properties in 2,600 cities in 192 countries.

Before You Launch a Customer Funded Lean Start-Up So, take heart. The seven domains model articulated in The New Business Road Test: What Entrepreneurs and Executives Should Do Before Launching a Lean Start-Up offers a clearer way to answer the crucial question: "Why will or won't my idea work?" The model is comprised of four market and industry domains and three additional domains that address the central elements in the assessment of any market opportunity:
  • Are the market and industry attractive?
  • Does the opportunity offer compelling customer benefits as well as a sustainable advantage over other solutions to the customer's needs?
  • Can the team deliver the results they seek and promise to others?

So Road Test your entrepreneurial opportunity - from the road, if you like, using the New Business Road Test app - before you even think about launching. Then think about how to get customers to pay earlier and more to help fund the early stages of your business. Once you have proven your business model and attracted paying customers, you can approach investors from a much stronger position, keeping more equity and your job!