The Conjurer, Hieronymus Bosch, c.1475, Musée Municipal, St. Germain-en-Laye (Source: Wikimedia)
Ideas for Leaders #110

Custom-made: Customer Funding for Business Growth

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Key Concept

Venture capital (VC) is the default route to gaining funding for a growing business. But there are other ways to unlock money, indeed, some of the largest and most successful companies never raise any venture capital. Change your approach to growth by focusing on your customers, not investors, as your means to the end.

Idea Summary

Eureka! You’ve had the great idea, now you are off to write your business plan, get some investors on board, and head down the road to riches, simple as that.

This traditional approach to starting a business may seem obvious but the obvious course of action is not always the best, or the easiest, especially in these straitened times. Raising venture capital is time-consuming, it can be risky when you have little proof that your idea will work, and it may well come with onerous terms you have to adhere to. 

Recent research points to models for funding a business that utilise customers, not investors, with some of the most interesting applications coming from India and other emerging markets.

  1. The ‘matchmaker’ model brings buyers and sellers together. It charges a fee to sellers (and sometimes to buyers, Ebay being a good example) and yet the company need not own any goods or retain a lot of capital. An excellent example of this model is accommodation website, ‘airbnb’, which started up with no external capital, later raised $120 million from VCs, and now has 200,000 properties listed in 192 countries. By using funding from both sides – those needing a bed for the night and those supplying that bed - it earned the ‘proof points’ that would later enable it to gain VC funding.
  2. The pay-in-advance model, which has long been popular with consultants, takes a proportion of the fee up-front with further payments made as the project progresses. A good example from India is online B2B travel company, Via, which takes a deposit from local travel agents and in return provides them with real-time ticketing facilities and better commissions on tickets. It initially used these deposits to fund the business and only raised VC later when it moved into hotel, rail and bus ticketing.
  3. The subscription model, typified by newspapers and magazines, has again been used to great effect in India with customers’ money being used to fund the business. TutorVista links underemployed teachers in India with schoolchildren worldwide, the monthly subscription allowing parents to access assistance on any subject when required.
  4. The retailing sector has seen the emergence of the ‘scarcity-driven’ model, where the customer funds growth by purchasing goods that will not be re-stocked. Take Zara the fashion retailer which works on the principle of changing its lines all the time, a ‘once it’s gone, it’s gone’ approach that drives up sales of specific clothing.
  5. The ‘service-to-product’ model shows how you can provide your customers with something they need, using their money and/or resources to do so, and then grow your business around that need. Take MapmyIndia, the country’s leading digital map provider, which initially helped Coca-Cola translate valuable written information about bottling plants into maps. It gradually grew, providing mapping solutions to companies with little knowledge of the territories of India, but did not seek VC until later in its lifecycle. It now dominates the Indian satellite navigation industry.

The common link with these models is that they look to their customers for early funding. By using the customer base to help grow the business, they are in a much better position to get VC later on. 

Business Application

Keep in mind the following advice:

  • Before you look for VC, consider the downsides, particularly those related to time and risk.7
  • Investigate customer-driven approaches to funding, such as those outlined above.
  • Approach VCs later on in your business lifecycle – get the concept going and its marketability proved through customer-led funding initially, and you can be much more confident when you seek VC.
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Authors

Institutions

Source

Idea conceived

  • 2012

Idea posted

  • March 2013

DOI number

10.13007/110

Subject

Real Time Analytics