Start, finance and grow your business like Bill Gates
The Customer-Funded Smarts of Gates and Dell
What Gates and Dell, and many others like them, have figured out is that starting, financing and growing a company with their customers' cash, instead of investors', is a far more appealing way to go. "Easy for the likes of Gates and Dell", you might ask, perhaps, "but could I do it in my business?" In many cases, you can! How? Five ways:
- Matchmaker models: By bringing together buyers and sellers, but not owning what is bought and sold, 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 followed and the rest is history: 600,000 properties for rent in 192 countries!
- 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 $5000 deposit in advance in return for real-time ticketing capability and better commissions than the airlines were giving them. Do the maths: signing up 200 agents in the first few months gave Gupta $1 million in cash – his customers' cash – with which to start and grow his business! Just like Michael Dell, who required his customers to pay in advance for their customised PCs, but with a 21st century twist!
- 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 learn' – paid monthly in advance – was just what the teens' parents wanted. When renewal rates after the trial subscription quickly materialised at north of 50%, growing the business was simply a matter of adding more fuel. VC funds provided it, and Ganesh sold the business to Pearson in six short years for more than $200 million.
- 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 immediate credit card payment from his members who responded to the limited three-day online 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 sell their unwanted styles online and to start and grow what became one of France's hottest fashion brands.
- 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. Just what Bill Gates had done decades earlier, with his transition from writing operating systems for early PC makers into selling application software in shrink-wrapped boxes!
The Way Forward
If you're an aspiring 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!'
John Mullins is 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, September 2014)