By John Mullins
Are you looking for a venture capitalist to finance or grow your startup but you’re struggling in doing so? Surprisingly, perhaps, the vast majority of fast-growing companies get the funds they need from a much more hospitable and agreeable source – their customers. John Mullins shares five effective ways to do it.
A long-accepted notion in entrepreneurial circles is that the way to start and grow a thriving business is to come up with a great “idea”, write a great business plan, raise capital from angels or VCs, flawlessly execute the plan, and (Voila!) get rich! But it hardly ever happens this way, and the vast majority of successful businesses don’t ever raise venture capital. In fact, the majority of small businesses – after all, start-ups are always small businesses, for at least some time – simply remain small businesses, despite their ambitions to grow.
Despite the daunting barriers, most entrepreneurs still want to grow, for lots of good reasons: more profit to take home, more opportunities for their employees, greater give-back to their communities, and more. So how might they find the cash they need, without going hat-in-hand to reluctant bankers or pandering to VCs?
The Customer-Funded Business: A Better Way to Grow
It’s long been the case that the most sure-footed source of funding for companies that grow is their customers’ cash. That’s right: they use the revenue they get from what they sell to their customers, collected as early as possible, to cover the amounts they owe to their employees and their suppliers, paid as late as possible, to provide the necessary fuel for survival and growth.
Rocket science? No. It’s living on one’s float, really. But with VCs having hogged the entrepreneurial limelight for the past couple of generations, customer funding as source of cash for growth has been understudied and largely overlooked. You’ll scarcely find mention of it in business school classrooms or in textbooks on entrepreneurial finance.
This is sad, really, as some of the 20th century’s best-known entrepreneurs – Michael Dell, Bill Gates, and Banana Republic’s Mel and Patricia Ziegler, to name just a few – have done just that. The bright side of the story is this: there are five novel customer funding approaches that scrappy and innovative 21st century entrepreneurs have ingeniously adapted from their predecessors like Dell, Gates, and the Zieglers. Here’s how they do it: