The Customer-Funded Business

by Innovation Excellence

John MullinsI had the opportunity recently to interview one of my favorite professors from my time at London Business School, John Mullins. John taught a host of great entrepreneurship courses when I was there at LBS and continues to be a great teacher and a prolific writer. His latest book investigates the customer-funded business and what it takes to pursue this type of business successfully. Customer funding is different than crowdfunding, but I’ll let him tell you about all of that in his own words. His latest book is titled THE CUSTOMER-FUNDED BUSINESS: Start, Finance, or Grow Your Company with Your Customers’ Cash. This is the first of a two-part interview with John.

Let’s get to the questions:

1. In today’s economic climate, with the economies of many countries struggling to grow, you say this is the perfect time to start a new business. Can you explain?

“There is never an easy time to start a business and many new ventures will always fail. But now is a propitious time to challenge the status quo. Remember that Google emerged out of the rubble of a burst economic bubble to challenge the entire computing and communications landscape. The good news is that most large companies are conserving cash and pulling in their horns, leaving the field clear for entrepreneurs. Further, resources of all kinds – labour, space, technology and more – are less costly than they’ve been in years.”

2. But what about investor money? Isn’t it particularly hard to come by capital to start a business in economic conditions like these?

“It is indeed, and The Customer-Funded Business is timely in addressing exactly this question. My latest research has identified numerous businesses – young and old alike – that have found inventive ways to get their customers to pay for their earliest stages of development. More importantly, there are patterns in what they’ve done, five of them, and the book reveals them – the five customer-funded models – and brings them to life.”

3. Why should today’s entrepreneurs adopt a customer-funded approach?

“The best reason is that it sharply reduces risk. And it lowers the cost of failure, too. Failure is an important source of learning for entrepreneurs, but what you want to do is fail fast, and fail inexpensively. Taking a customer-funded approach will force your to find out – early! – whether customers are going to buy or not. That’s something most entrepreneurs would like to know! But that’s not all.

Getting cash from customers to support the establishment of a business is extremely helpful for several other reasons, too. First of all, it eliminates the need to spend precious time and energy attracting investment capital, which is a real distraction. Doing so also avoids the often-draconian terms that early stage investors typically require if they are to part with their money. And focusing one’s funding efforts on customers’ instead of investors can mercifully put to rest an idea that just isn’t going to cut it in today’s competitive marketplace.”

4. What about speed to market? Won’t reliance on customer funding slow you down?

“Not at all, and it can prevent having to ‘pivot’ too, or help you do so sooner and at less cost. Sadly, there’s the largely naive belief that something called first mover advantage exists. Most of the time, it does not. Excel wasn’t the first spreadsheet. Amazon wasn’t the first online bookseller. The iPod wasn’t the first MP3 player, nor was the iTunes store the first place to buy digital music one track at a time. As my fellow writer and business researcher Jim Collins has noted, “Best beats first, every time.” Speed to market can be important in some situations, but more often, haste makes waste.

Customer Funded Business5. What about passion? Is it still important for start-ups?

“Many entrepreneurs fall head over heels in love with their product or technology, and they have a hard time distancing themselves enough to ask a fundamental question: Why will – or won’t – my idea work? A much more sure-footed approach is to get your customers to fund your business at the outset. If they do so, that’s the best news you can get, and a real confidence-builder, too. And if they won’t give you their money – by buying what you plan to sell – maybe you are on the wrong track.”

6. Could you explain the five customer-funded models articulated in The Customer-Funded Business and how you arrived at this set of ideas?

“First of all, getting customer funding isn’t new. It’s exactly what Michael Dell, Bill Gates and Banana Republic’s Mel and Patricia Ziegler did to get their companies up and running and turn them into iconic brands. Based on nearly years of research, I have uncovered five novel approaches that scrappy and innovative twenty-first century entrepreneurs have ingeniously adapted from their predecessors like Dell, Gates, and the Zieglers:

  • Matchmaker models (for example, the U.S. companies Airbnb and DogVacay)
  • Pay-in-advance models (the USA’s Threadless, India’s Via and Loot)
  • Subscription models (India’s TutorVista, the USA’s H.Bloom)
  • Scarcity models (Spain’s Zara, France’s vente-privee, the USA’s Gilt Groupe)
  • Service-to-product models (Denmark’s GoViral, Puerto Rico’s Rock Solid Technologies).

In the book, I dig deeply into each of the five models and companies that have pursued them, both successfully and not.”

7. You are targeting this book at angel investors and those who run incubators and accelerators, in addition to entrepreneurs. Why?

“Angel investing can be hugely rewarding, but it’s very risky. Most business angels who have been around for a while understand that. The book gives them a way to improve their odds – and those of the entrepreneurs they support, too! In each of the chapters there’s a checklist of questions which angel investors will – or should! – ask.

8. What about crowdfunding? Is that what you mean by ‘customer-funded?

“Crowdfunding is all the rage today, but I think there’s a backlash looming, as projects and companies that were crowdfunded fail to deliver on time and on budget. Raising money is actually the easy part of starting a new business, believe it or not. Getting the product right and finding the right customer who simply has to have it is much more difficult. And crowdfunding does little to address these issues.”

Conclusion:

Thank you John for agreeing to do this interview. You’ve given us so much great content that I’ve broken up this interview into two parts, so stay tuned for the second part of my interview with John Mullins coming up later this week.

About the Author:

JOHN MULLINS is the author of the definitive book on assessing new venture opportunities, THE NEW BUSINESS ROAD TEST: What Entrepreneurs and Executives Should Do Before Launching a Lean Start-Up (FT/Prentice-Hall, fourth edition, 2013), and an Associate Professor of Management Practice at London Business School. He is also co-author of the critically acclaimed GETTING TO PLAN B: Breaking Through to a Better Business Model (Harvard Business Press, 2009). His newest book, THE CUSTOMER-FUNDED BUSINESS: Start, Finance, or Grow Your Company with Your Customers’ Cash, was published in August 2014 (Wiley).


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Braden KelleyBraden Kelley is a popular innovation speaker, builds sustainable innovation cultures, and tools for creating successful change. He is the author of the five-star book Stoking Your Innovation Bonfire and the creator of a revolutionary new change planning toolkit coming soon. Follow him on Twitter (@innovate) and Linkedin.

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