Lessons for Customer-Funded Entrepreneurs #BootUpINDIA

More than two generations ago, the venture capital community – VCs, business angels, incubators, and others – convinced the entrepreneurial world that writing business plans and raising venture capital constituted the twin centerpieces of entrepreneurial endeavor. They did so for good reasons: the sometimes astonishing returns they’ve delivered and the incredibly large and valuable companies that their ecosystem has created. But the vast majority of fast growing companies don’t take venture capital, at least at the outset. Are they on to something that most of today’s entrepreneurial ecosystem – VCs, business angels, incubators and accelerators, and all the rest – have missed? Do their stories hold lessons we can learn?

Is there an alternative to VC? Indeed, there are five!

There are five novel approaches that scrappy and innovative twenty-first century entrepreneurs have ingeniously adapted from their predecessors – like Michael Dell, Bill Gates, and Banana Republic’s Mel and Patricia Ziegler. What Dell, Gates, and the Zieglers have in common is that they all started and grew their companies largely with their customers’ funds. Here are some of the lessons their stories hold:

    • Lesson 1 – Matchmaker models: By bringing together buyers and sellers, but not owning what is bought and sold, today’s matchmakers build great companies with virtually no startup capital. For Airbnb, the initial investment in 2007 was for a couple of air mattresses on the founders’ San Francisco apartment floor. By narrowly focusing on conventions that were too big for the city’s hotel inventory, Brian Chesky and Joe Gebbia built their business one step at a time until they got noticed in 2008. VC funding eventually followed, and the rest is history: 500,000 properties in 192 countries!
    • Lesson 2 – Pay-in-advance models: Bangalore’s Vinay Gupta built Via into the “Intel Inside” of the Indian travel industry. How? By asking India’s mom-and-pop travel agents for a rolling $5,000 deposit in advance in return for real-time ticketing capability and better commissions than the airlines were giving them. Do the maths: 200 agents in the first few months gave Gupta $1 million in cash with which to start and grow his business!
    • Lesson 3 – Subscription models: Krishnan Ganesh started TutorVista with three Indian teachers and a VoIP internet connection reaching American teens who needed help with their homework. He quickly learned that $100 per month for “all you can eat” – paid monthly in advance – was just what the teens’ parents wanted. When renewal rates after the trial subscription quickly materialized at north of 50 per cent, growing the business was simply a matter of adding more fuel. He sold the business to Pearson in six short years for more than $200 million.
    • Lesson 4 – Scarcity models: Jean-Jacques Granjon and his partners created the flash-sales phenomenon by doing something simple for Parisian designer apparel makers who needed to move unwanted inventory. By collecting payment from his online members who responded to the limited 3-day sales and limited quantity available at discounted prices, and paying his vendors long after the goods had been ordered and shipped, Granjon didn’t need any capital to start or grow what became one of France’s hottest fashion brands.
    • Lesson 5 – Service-to-product models: Claus Moseholm and Jimmy Maymann of GoViral, a Danish company created in 2003 to harness the then-emerging power of the Internet to deliver advertisers’ video content in viral fashion, funded their company’s startup and growth with the proceeds of one successful viral video campaign after another. In 2011, after having turned their service business (creating and hosting viral video campaigns) into a product platform that stood on its own, GoViral was sold for $97 million, having never taken a single krone or euro of investment capital.

The way forward: Lessons learned

If you’re a bootstrapping entrepreneur lacking the startup capital you need, an early-stage entrepreneur trying to get your cash-starved venture into take-off mode, or an angel investor, mentor, or business accelerator or incubator professional who supports high-potential entrepreneurial ventures, a customer-funded approach may offer the most sure-footed path to starting, financing, or growing your business or one you support. In the words of Shanghai’s entrepreneur and angel investor Bernard Auyang, “The customer is not just king, he can be your VC too!”

Post contributed by John Mullins, Associate Professor of Management Practice in Marketing and Entrepreneurship at London Business School. His latest book is The Customer-Funded Business: Start, Finance, or Grow Your Company with Your Customers’ Cash (Wiley, August 2014), from which this post has been adapted.