Use Customer Cash To Finance Your Start-Up

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John Mullins
July-August 2013
By D.Ravi Varma (B605)

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About Author:
John Mullins.
He is a Standford MBA and Ph.d. At present he is the faculty at London Business School. His teaching subjects include Financing the entrepreneurial business, Business plan developement and many more.. Getting to plan-B was his major achievement.

What do You mean by Start-up?

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The money that is required to start a new business.

Toptomato.in

Hifives.in

 Airbnb is one of the most celebrated start-ups of the past decade. In 2007 two design school graduates dusted off some air mattresses and rented out space in their San Francisco apartment to conference attendees who couldnt find hotel rooms, netting

Coming to the world of Entrepreneurship

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$1,000.
By 2012 Airbnb had raised $120 million in venture funding and

was valued at more than $1 billion.

The business model is structured so that advance customer cash helps finance growth.

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Its a strategy more new businesses should consider: receiving cash from customers before having to lay out money for the product or service to be sold.(Negative Working capital).

One of the biggest benefits of doing so is that it allows company founders to focus on creating, testing, refining, and proving their business models instead of on courting investors.

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Customer-funding model is especially helpful when traditional forms of financing, such as bank loans, are tight, as is the case in many markets right now.

Discover a Better Form of Financing

Many start-ups spend too much time looking for financing

and invest too much money in prototypes or inventory.

Some entrepreneurs avoid those traps by adopting business models that give them advance access to customers cash as a means of funding early growth.

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The Matchmaker Model

Some companies entire business models consist of connecting buyers and sellers. These companies do not have inventories and the cost of goods sold is extremely low.

Example : Ebay and Expedia.

The Deposit Model:

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In deposit model the company initially accepts deposits from public and render the services as and when recquired by the

customer.
A classic example is the travel start up Flight Raja (Now Via) which used this model . Initial deposit of $5000 from travel agents. Within 2 months it had signed up 180 agents booking 200

tickets a day.
After 1 year it had signed up 3000 agents in 290 cities.

By 2012 annual revenue crossed $500 million.

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The Subscription Model:

Customer pay a predictable monthly fee in advance, the business is high capital efficient and it enjoys smoother

revenue growths than most start ups do.

In 2005 Krishna Ganesh hired 3 teachers in Bangalore.

Newspapers and cable networks have used subsciption models for many years.

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The Standardize And Resell Model

Start-ups leveraging this model develop technology or systems that do what people have been doing manually in

labor intensive businesses .

This strategy relies on offering a customer the process so they no longer have to do the process manually and have them provide a contract that finances your developing the tech or process yourself.

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The Scarcity Model

Companies leveraging this model use scarcity to motivate

customers to pay and buy early and quickly.

This tactic takes advantage of the situation that retailers normally have credit with their vendors.

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Conclusion
Each of these models allowed company founders to launch with little or no external financing and to use the time not

spent seeking potential investors to fine tune their business.

Customer funded models dont suit every venture . Capital intensive projects that recquire manufacturing plants other infrastructure must almost always relay on traditional

financing.

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