“This is THE cornerstone idea for entrepreneurs—to shun all other avenues first and pursue customers to fund their venture. This provides a critical forcing function business leaders need, in order to guarantee they are creating something truly valuable. After learning this lesson the hard way (raising angel funds and failing), my two latest ventures have followed Mullins' sage advice and flourished.”
—Verne Harnish,
CEO Gazelles;
Author of Scaling Up and Mastering the Rockefeller Habits
“The customer is not just king, he can be your VC too! John Mullins' brilliance has inspired my own success for many years and his ideas can drive yours as well.”
—Bernard Auyang
Entrepreneur and investor;
International Chairman 2014–15, Young Presidents' Organization
“Mullins has connected the dots. His clarity of insight blazes through in the five crisp models of the customer-funded business. He sharpens our understanding of how to use the power of market innovations and customer traction to fund emerging businesses. A great set of tools for the new and experienced entrepreneur.”
—Jerry Engel
General Partner, Monitor Venture Partners;
Adjunct Professor Emeritus,
Haas School of Business, University of California Berkeley
“John Mullins' sage advice for entrepreneurs and the investors who back them is just as important for established companies that are trying to unlock innovation and growth. Customer funding is a powerful approach that too many businesses have simply forgotten, or never understood. If you don't read this book, you'll lose out to competitors who do.”
—Mike Harris
Founding CEO of First Direct and Egg Banking;
Author of Find Your Lightbulb
“Hits the nail on the head. Customer funding isn't just another source of capital for starting or growing your business. It is—by far—the most intriguing source available. Mullins shows why, and he shows five ways to obtain it, too.”
—Tom Byers
Professor and Director, Stanford Technology Ventures Program,
Stanford University;
Coauthor, Technology Ventures
“A timely reminder not to see your customers only as a source of credibility when you are starting out but as a valuable source of funding—particularly in the early days. Packed with good anecdotes and inspirational tales of entrepreneurial success (and failure), John Mullins nails it again!”
—Richard Gourlay
Managing Director, Sussex Place Ventures
“Happiness is a positive cash flow. I remind my students that venture capitalists (and most angels) don't typically fund new businesses, they fund businesses that are poised to grow rapidly. The five models that John highlights can help entrepreneurs launch and validate their businesses when other sources of capital are scarce and expensive.”
—Andrew Zacharakis
The John H. Muller, Jr. Chair in Entrepreneurship, Babson College
“There are many books aimed at helping you develop the perfect pitch to ensure you get investment. But entrepreneurs start businesses, not investment vehicles. This book is a grand journey through many ways that we can build these businesses using other people's money or shifting our business model. And importantly—keeping the valuable equity to ourselves. Do not raise equity investment until you have read this book and considered every other option.”
—Dale Murray
Cofounder Omega Logic, British Angel Investor of the Year 2011
“Worth the price of the book for Chapter 8 alone. Most startups will never have a chance to secure an institutional investment. Some may never need one. John Mullins shows entrepreneurs another path employing proven Customer-Funded Business alternatives. Even if you plan on eventually scaling with venture capital, customer funding can be a smart path to experiment and prove your business in advance.”
—Randy Komisar
Partner, Kleiner Perkins Caufield & Byers;
Lecturer, Stanford University;
Author of The Monk and the Riddle
“Very accessible, thorough, and will no doubt be useful to aspiring (or struggling) entrepreneurs. The models are a great analytical tool which the case studies bring to life.”
—Amar Bhidé
Schmidheiny Professor, The Fletcher School, Tufts University;
Author of The Venturesome Economy and A Call for Judgment
“With The Customer-Funded Business, John once again provides us with a fantastic book. If someone is looking for inspiration on how to keep their cash requirements to a minimum and de-risk their investment—this is the first book they should pick up and read.”
—James King
Founder and Chairman, Find Invest Grow (FIG)
“Truly engaging. ‘Ring the cash register and sit on the float—and avoid running out of money and going out of business.’ John Mullins convincingly guides entrepreneurs to dump their PowerPoint slides and look to their paying customers as their ‘first ports of call.’ Early stage investors might want to think in similar fashion!”
—M.S. Rao
Professor, S P Jain Institute of Management and Research
“Essential reading for any budding entrepreneur—a revolutionary approach to funding a new venture. A fresh perspective on funding and scaling ambitions.”
—Jim Hall
Executive Director, Entrepreneurship Centre,
Saïd Business School, University of Oxford
“Professor Mullins breaks down the myth that the key to a successful business is to raise venture capital first. His prescriptions for finding the right customers and getting them to fund your business are a great step-by-step guide to raising venture capital—build the business first and the investments will follow!”
—Bill Earner
Partner, Connect Ventures
“Practical and pithy, and a must read for an entrepreneur, full of pragmatic insights relevant to any entrepreneur or business executive.”
—Sunita Singh
Cofounder and Senior Director, National Entrepreneurship Network, India
“A truly fascinating book, long overdue. John Mullins has brought out a completely new paradigm in financing businesses. A lot of business failure will be avoided if entrepreneurs really understand the message and practice it.”
—Kavil Ramachandran
Thomas Schmidheiny Professor of Family Business
and Wealth Management, Indian School of Business
“John Mullins has done it for the third time. After The New Business Road Test and Getting to Plan B, he has produced yet another book for entrepreneurs, investors and educators that is based on rigorous research and at the same time engaging and practical. He shows how entrepreneurs can postpone raising costly venture funding by obtaining funding from customers in the early stages of their businesses.”
—Rama Velamuri
Professor of Entrepreneurship,
China Europe International Business School, Shanghai
“A timely and healthy antidote to the almost universal focus on financing issues in starting new ventures. Mullins argues very convincingly that for most non-tech start-ups, seeking external financing not only is extremely time consuming and only rarely works, but often is counterproductive to developing sustainable businesses serving real customers' needs. Mullins builds on his evidence-based approach to entrepreneurship successfully demonstrated in his previous best-sellers The New Business Road Test and Getting to Plan B and provides would-be entrepreneurs with well-thought-through tool kits and real-life case stories.”
—Søren P. Hovgaard
Head of Entrepreneurial Development Unit;
External Associate Professor, Department of Economics,
University of Copenhagen
“A paradigm-shift in the way we think about startup funding. While ‘lean startup,’ ‘bootstrapping,’ and other methodologies have had their day in the startup spotlight, reading this book makes me realize that the next decade belongs to customer-funded businesses. And this book shows the way. Starting up, as well as angel investing, has more madness than method. But the five customer-funded models, as well as the ‘John's Business Angel Checklists’ at the end of each chapter, distill the process down to its essentials.”
—Ajeet Khurana
Top-15 Angel Investor, India, 2013
“The Customer-Funded Business gets it. Great practical advice for those seeking to crowdfund their ventures. I recommend John's book to those wanting a grounding in customer-funded business that is also deeply entrepreneurial in spirit. I can't wait to put this book into action!”
—Norris Krueger
Entrepreneurship Northwest;
Fellow, Max Planck Institute
“Spot on for the entrepreneur as well as the angel investor…and even the business professor. Mullins' wisdom, experience and knowledge of entrepreneurs come through on every page. Particularly insightful to me were the ‘John's Business Angel Checklists’ at the end of Chapters 2–7. This book should be one that every entrepreneur takes time to read so that they build their business on solid and sustainable ground.”
—Keith Williams
Senior Vice President Member Experience;
Entrepreneurs' Organization (EO)
“John and I came to very similar insights from over a decade of very different kinds of research into what successful entrepreneurs have learned to do well. This book captures beautifully what an expert entrepreneur I studied told me, ‘Treat your first customers as your partners—they are your earliest investors and your best salespeople.’ The compelling stories in this book invite you and inspire you to learn how to do that.”
—Saras Sarasvathy
Isidore Horween Research Associate Professor,
The Darden School, University of Virginia
“Two of the most critical tasks that you as a startup CEO/Founder have to do are hire the right people and keep your company appropriately financed. While venture finance can accelerate the growth of businesses where appropriate, many times a company can benefit from other, more independent forms of funding their growth, particularly in the very early stages. Applying the concepts and tools in this book will likely make your company that much more attractive to an investor, for the investment capital they give you will be used to accelerate growth, rather than just provide financial subsistence.”
—Carlos Eduardo Espinal
Partner, Seedcamp
“A very timely book. Investors are thin on the ground and entrepreneurs have to turn to alternative and even better sources of investment. Entrepreneurs are asked to prove the merits of their ventures and what better way than through customers. John's gift for writing makes this an easy read and reminds us that ‘cash is king.’”
—Dr Shai Vyakarnam
Director Centre for Entrepreneurial Learning,
University of Cambridge, Judge Business School
“Whether you are starting up a business in a garage or doing as I did, building one overseas on behalf of a large North American firm, this book is a relevant and compelling read. You are left in no doubt that Cash is clearly still King! John gives you the tools as well as his practical ‘business angel checklists’ coupled with captivating anecdotes to challenge and ultimately help you choose the right funding model for your business.”
—Peter Moores
CEO and Country Manager UK, Raymond James
“Another great book that gets to the heart of building companies. I wish more entrepreneurs understood the significance and freedom that cash generation can bring to young, fledging businesses. It puts an entrepreneur in the driver's seat. As a venture capitalist, I dream of entrepreneurs that are able to independently validate their product or service with the market, lay down early traction and are constrained only by capital to take their companies to the next level. John's book provides a comprehensive framework for thinking about how to generate cash and become self-sufficient as an entrepreneur.”
—Hussein Kanji
Founding Partner, Hoxton Ventures
“Throughout my 30 years in business, finding quality books which get to the heart of key issues for both entrepreneurs and investors has been a rarity. The Customer-Funded Business does exactly this, providing excellent, straightforward advice along with real life examples. John has been there and done it in the business world. His knowledge and experience are clear to see.”
—James Caan
Author of Start Your Business in Seven Days and The Real Deal
“John provides a vital sanity check for inexperienced founders. Time chasing investors is often better spent creating (and realising) customer value.”
—Dave Chapman
Vice-Dean for Enterprise, University College London
“John Mullins' expertise is giving us forehead-slappingly new insights into taken-for-granted ideas. In this age of Kickstarter, we all think we know all about customer funding, but in this book John shows us Kickstarter is only one of five ways to get customers to fund our businesses. With great stories and great style, John takes what we all know and makes it fit together in new and powerful ways.”
—Jerome Katz
Coleman Professor of Entrepreneurship, Saint Louis University
Cover image: Photograph: Gold Doubloon © iStock.com/joecicak, Background © iStock.com/peter zelei
Cover design: Wiley
Copyright © 2014 by John Mullins, PhD. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Mullins, John W. (John Walker)
The Customer-Funded Business: Start, Finance, or Grow Your Company with Your Customers' Cash/John Mullins, PhD
pages cm.
ISBN: 978-1-118-87885-9 (cloth); ISBN: 978-1-118-87913-9 (ebk);
ISBN: 978-1-118-87904-7 (ebk)
1. New business enterprises—Finance. 2. Venture capital. 3. Customer relations. 4. Entrepreneurship. I. Title.
HG4027.6.M65 2014
658.15′224—dc23
2013050602
Becoming—and being!—an entrepreneur is difficult. Raising capital to fund one's entrepreneurial journey is even more difficult. Each year—in the good years—only about 1,500 U.S. startups get funded by venture capitalists, alongside another 50,000 or so by angel investors, a paltry number against the 5 million ventures that seek startup funding.1 According to research from Statista, the numbers these days are worse: only 843 seed-stage deals were done by U.S. venture capital firms in 2013, though that figure is the best in years, more than double the number in 2010.2 Difficult, indeed!
The numbers elsewhere, including in the UK, where I spend most of my time, are even more daunting. In Europe and Asia, they're tougher still. I know firsthand how difficult it is, because I've been in startup and capital-raising mode multiple times during the first half of my career. In the second half, as a professor at one of the world's leading business schools, and as a board member and investor, I've helped hundreds of individuals surmount—or circumvent!—the fundraising and other challenges to become thriving entrepreneurs. Some, you may be surprised to hear, did it inside large companies. Others, the more typical, got their start in their kitchens or garages, or over a couple of beers at the local pub.
The vast majority of them, however, didn't follow the prototypical path that the conventional wisdom holds as gospel today:
In fact, most of the companies whose names populate the lists of the world's fastest-growing companies—the Inc. 5000 in the USA, the Fast Track 100 in the UK, and similar lists everywhere—didn't follow the conventional script, either.
What did they do? The vast majority of them never took a pound or dollar or rupee of venture capital, and they didn't mortgage or pledge their houses, either. Instead, they managed to find ways to get their businesses up and running, and then growing, without pandering to VCs or groveling to their company's CFO. By solving pressing customer problems, or by developing delightful customer experiences that transformed the previously mundane—think Peet's or the UK's Coffee Republic in coffee bars or Banana Republic in casual apparel—most of these entrepreneurs built vibrant, growing businesses without raising troves of venture capital. “So where did their funding come from?” you ask. The lion's share of them got most of their money—initially, at least, and sometimes for the entire journey—from a much more hospitable and agreeable source: their customers.
“Why, then,” you might ask, “have the business plan and the raising of venture capital become seen as the centerpiece of entrepreneurial endeavor?” Two reasons, in my view.
First, the venture capital community—VCs, business angels, incubators, and much of the rest of today's entrepreneurial ecosystem—has stolen the entrepreneurial finance limelight over the past two generations or so, first in California and Boston, and more recently practically everywhere else. They've done so for good reasons: the sometimes astonishing returns they've delivered to themselves and their investors, and the astonishingly large and valuable companies that this ecosystem has created. The valuations of companies like Apple, Amazon, and Twitter do make good headlines! If all the companies backed by the venture capital industry were thought of as a country, it would stand as one of the world's largest economies today.
There's nothing inherently wrong with venture capital. I've both raised it and provided it myself. But as we'll see in Chapter 1, VC has some drawbacks worth understanding, especially when it's raised too early in the life of one's venture.
Second, we in the academic community have learned that we can teach people to write business plans—which can be submitted as a pile of paper with a staple in the corner—and students will flock to us in droves! Never mind that one cannot really plan very well for a highly uncertain entrepreneurial venture, and that new-venture success most often arrives in the shape of Plan B or Plan Z, not the Plan A that has been so lovingly articulated in the business plan. We can teach them to plan (and we can teach them to pitch, too), so plan (and pitch) they will!
But the vast majority of fast-growing companies don't get their money this way. As we'll see in Chapter 1, there are compelling reasons why getting the funding you need from your customers is often a much better way to go.
In early 2012, I embarked on a research journey to develop a deeper understanding of the plucky entrepreneurs who build great companies—sometimes small ones to fit their lifestyles, other times large ones that have become household names—and the methods (five of them, each different from the other) they've used to start and grow their businesses with their customers' cash. The book you are now holding in your hand or viewing on your screen delivers the fruits of my journey.
But the book delivers much more than just my own insights and the evidence I've gleaned. It's filled with the captivating stories of companies—Airbnb, Dell, Banana Republic, and many more—that have been built and financed this way (at least at the outset, though often not forever) and is brimming over with early-stage investors' perspectives. As a result, the book makes what I believe is a compelling case for customer funding as the first approach that entrepreneurs—whether in garages or around kitchen tables or in well-established companies—should consider when funding their nascent businesses. And I'm not alone in this view. Some of today's savviest investors share it, too!
Indeed, venture capital investor Fred Wilson of Union Square Ventures puts the folly of raising too much venture capital too early in stark terms. “The fact is that the amount of money startups raise in their seed and Series A rounds is inversely correlated with success. Yes, I mean that. Less money raised leads to more success. That is the data I stare at all the time.”3 Two-time entrepreneur turned venture capitalist Mark Suster of Upfront Ventures is of a like mind. “I say ring the freaking cash register,” he says. “I have said so for years.”4
That's what customer funding is all about at the end of the day, through any of the five ingenious ways I've uncovered to do it. Ring the cash register early enough and often enough and you'll have the magic of customer traction—hence the funding—you need to get your fledgling business off the ground. Are Wilson, Suster, and I merely foolish or naïve? Or might we be onto something, even a customer-funded revolution, perhaps?
Given the global diversity of the entrepreneurs and their companies—from Europe, Asia, and North America—whose often inspiring stories bring this book to life, there are six key practitioner audiences worldwide for whom I have written this book:
There's one other important audience I have in mind as well. I've also written this book for my fellow faculty who are teaching entrepreneurship or venture capital in the world's growing number of business schools and other academic institutions offering vibrant entrepreneurship programs. Together we are creating and empowering a new generation of entrepreneurs who are charged with creating virtually all of what will be our communities' net new jobs in the future. It's a crucially important role that we and our graduates must play in today's volatile and uncertain economic environment.
I suggest that we faculty all add a session to our business plan and entrepreneurial finance courses that offers customer funding as an alternative approach—in my mind, the preferred approach—to getting a young company underway. In doing so for your students yearning to start their own businesses, whether now or later, you will join me in getting them focused on customers, instead of investors. Once they have enough customers, the investors—if needed at all—will surely follow.
My two earlier books, the first (The New Business Road Test) on how to rigorously and systematically assess an entrepreneurial opportunity before you get started,6 and the second (Getting to Plan B) on how to get to a business model that will actually work—and might just revolutionize your industry7—have prepared me well and set the stage for the unanswered question that this book addresses: “How can I best start, finance or grow my company with my customers' cash, instead of that of investors?” But that's not all.
Having started two entrepreneurial companies and worked at a third, and having served on the boards of numerous others, including successes and failures, I've accumulated the scars and bruises that are always the surest sign of learning. More than that, though, for more than two decades in this, my second career, as a business school professor, I've been fortunate enough to have had the time and resources to dig deeply into the “whys” and “hows” that underlie entrepreneurial success and failure. Simply put, I'm in the right place at the right time to have researched and written this book.
My purpose in putting The Customer-Funded Business into your hands is to get entrepreneurs of nearly every kind to see that their top priority in the early going—and often later, too!—is to find a customer who will pay you on good terms (often in advance), not to raise venture capital. To address this purpose, the book brings to life five customer-funded models and the key questions that should be asked in considering (Chapters 2 through 7) and pursuing (Chapter 8) each of them. It also addresses the key implementation questions that will surely arise:
Whether you're an aspiring entrepreneur lacking the startup capital you need, an early-stage entrepreneur trying to get your cash-starved venture into takeoff mode, a corporate leader seeking funding to grow an established company, or an angel investor or mentor who supports high-potential entrepreneurial ventures, this book offers the most sure-footed path to starting, financing, or growing your business or one you support. Are you intrigued? Ready to be inspired? If so, turn the page!