Pitch your Startup

10 Ways to Kickstart your Startup – Part 4 – Bootstrapping – Convince your first customers to finance your startup

Startup financing cycle

Startup financing cycle (Photo credit: Wikipedia)

Many people don’t think its possible to get a customer to fund your business, but it really is, especially where you have a product or service that is not a commodity.

Recently when mentoring a startup I suggested this and they were shocked, they didn’t believe it was possible, however some months later they had managed to get one of their new business customer to accept the idea of paying upfront for the still to be completed product (and the revenue arrived before the fundraising they were holding out for).

Many entrepreneurs are stuck hoping and wishing they can raise capital, truth of the matter is it can take 3-12 months to raise your first round (or never), customer revenue on the other hand could only be a few weeks away.

 

If you are solving a difficult problem and you can convince a few customers you have a compelling new solution (albeit with some rough edges) there is every likelihood that you can convince them to pay up front or pay to develop additional features that meet their needs (which hopefully just happen to be in your roadmap).

This concept is missing from the Startup Financing Cycle graph above and there is every chance that tapping your customers for finance will get you through the Valley of Death or at the very least reduce the amount of capital you need to raise and allow you to retain more equity.

 

Given you can only grow a business as quickly as you can turn cash (I will go into more depth on how to accelerate your funding later in the 10 Ways to Kickstart your Startup series) bringing revenue forward by getting customers to pay upfront is much more common than you might believe.

 

Kickstarter is the modern consumer incarnation of this method but it has happened for as long as companies have existed, Kickstarter has just found a mostly frictionless method to facilitate this on a global scale and connect non businesses or would be startups and consumers.

Kickstarter

Kickstarter

When I started my first business I would insist on payment in advance, we turned over $4m in our first full financial year so I simply didn’t have the cash to fund this and there was no other way for me to do business.

 

Surprisingly very few people actually rejected this, especially when you explained to them that you were growing so quickly this is the only way you could fund the growth. You have to be ready to be a bit embarrassed about this, but you have to suck it up as it may be the only way for you to succeed.

I am not anti Venture Capital, quite the opposite, however I tell most Startups I meet that their ability to retain their equity is a function of how much pain they are willing to put up with and they are better off turning to VC when they are growing so quickly they can’t fund the working capital required to support the growth, which is a fantastic position to be in.

So a few suggestions on how to do this (primarily for the business market)

  • If you are selling a new technology or type of product, explain to the customer exactly what stage you are at, show them the product, tell them what the risks are and what your plan is, assuming you meet their previously unmet needs and they trust you and they can see the product is going to work for them, ask them for a deposit or get them to place and pay for an order. If the tech guy tells the purchasing and finance guy this is the only way to get the problem solved then often they will simply pay you, it’s amazing to see this turn up in your bank account.
  • If you are selling an existing product and its a large order (above your financing capacity) ask the customer what you can do to make the deal more attractive, for example is there an extra service you could throw in if he can pay upfront, something that might save their team a lot of time but might not take your team much time, or can you coordinate a late night or weekend install/upgrade?
  • If you are selling a service ask for a commencement fee.
  • If a customer has a particular need, tell them you are happy to build it to their requirements if they can fund NRE (Non Recurring Engineering) costs. Ideally the feature you develop will be part of your roadmap and you have managed to get the customer to help fund your development costs.
  • In large roll-outs, get customers to pre-purchase and pay for large orders and release it from your stock as they need it. It’s pretty easy to convince them you will keep it ready for them and they don’t have to worry about delays, you get paid both for the cost of the product and your profit (if you are working with a distributor, place an order on the stock and get it secured but ask them to only part ship for you, that way you only pay as you use it, but you have the customers cash, I will give an example of a sophisticated version of this below with Dells supply chain)

Dell

English: Dell Logo

English: Dell Logo (Photo credit: Wikipedia)

One of the best corporate examples of this is Dell. Dell gets paid in advance for the majority of their orders.

When you place an order you pay upfront via the Website (which everyone thinks is normal) but they don’t supply the product for another 7-21 days.

When you place your order they usually don’t even own the parts that they will use to build your product yet.

Here is how it works

  • You place your order
  • You pay upfront
  • The order is sent to the factory
  • The suppliers are required to be within 50km of Dells assembly plants and have their parts and trucks ready to go.
  • Dell orders the parts to make the batch of product they are scheduling that day
  • The supplier trucks are all lined up on one side or outside the plant.
  • When the truck rolls across the plants threshold, Dell now owns the product (note, most companies are invoiced when a shipment leaves the supplier warehouse, not Dell, suppliers don’t get to invoice until it hits their assembly line).
  • They assemble the PC and ship it to you
  • They pay their suppliers in normal commercial terms of >60 days (according to an analysis of their accounts their average debtor days could be as much as 80 days http://www.mysmp.com/fundamental-analysis/days-payable-outstanding.html)

So if you can convince your customers to follow some or all off the above methods there is every chance you can get your startup off the ground and be doing business without seeking external funding. Good luck

As always I welcome questions and comments, leave a message below and I will respond

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▶ Geoffrey Moore – Video – Crossing the Chasm – Must watch for new B2B high tech companies

Geoffrey Moore - Crossing the Chasm

Geoffrey Moore – Crossing the Chasm

Early in my career I spent 5 years at Hewlett-Packard selling and marketing new high tech products back when Cisco could demand $50-100k for a switch. HP put us through a number of multi day courses from this guy and I have to tell you in the world of selling B2B and B2C high tech products there is no better model or lessons you could learn than Geoffreys concepts of “Crossing the Chasm” and “In the Tornado” and the Bowling Alley.

He explains it here and if you ever intend to sell any new high tech to a business you must watch this and read his books.

 

 

NOTE: You can buy this at Amazon or others but we do not do affiliate links so you can make your own way there. The Authors site is here http://www.dealingwithdarwin.com

About Geoffrey Moore

Managing Director, TCG Advisors
Venture Partner, Mohr Davidow Ventures

Geoffrey Moore is a best-selling author, a Managing Director at TCG Advisors and a venture partner at MDV. Recognized as a leading business consultant to large companies facing formidable strategic challenges, Geoffrey works with established enterprises in his role of Managing Director of TCG Advisors. In this role, he divides his time between consulting on strategy and transformation challenges with senior executives and developing mental models to support the practice. With this focus in mind he has written Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution. Also recognized for his expertise in market development and business and investment strategies, as a Venture Partner at Mohr Davidow Ventures he serves as an advisor to many of their portfolio companies by drawing upon best practices derived from his extensive background working with technology startups.

Geoffrey has made the understanding and effective exploitation of disruptive technologies the core of his life’s work. His books, Crossing the ChasmInside the Tornado,The Gorilla Game, and Living on the Fault Line are best sellers and required reading at leading business schools. Highly regarded as a dynamic public speaker, Geoffrey is the founder of The Chasm Group and currently is the managing partner of TCG Advisors. Earlier in his career, he was a principal and partner at Regis McKenna, Inc., a leading high tech marketing strategy and communications company, and for the decade prior, a sales and marketing executive in the software industry.

He holds a bachelor’s degree in literature from Stanford University and a doctorate in literature from the University of Washington.

 

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Pocketbook hits #2 Finance App on Australian App store

Pocketbook-web

Pocketbook-web

I met Bosco Tan at Peter Coopers Sydstart last year. At the time he looked like he was in for a long hard road to get users to give up access to their bank accounts and to get any support from the banks.

Well persistence pays, because it looks like they are really getting some traction. The Pocketbook web and Iphone app is Australia’s equivalent of Mint.com (which doesn’t work outside the USA), it allows you to sync all of your different bank accounts, credit cards and then automagically reviews your transactions and automatically catergorises most of them and tracks recurring bills and payments and puts these into a budget and bill schedule so you get a reminder when it due.
Pocketbook gives you one view of all of your accounts which is pretty handy.

I found the whole signup routine very slick, it was clear a lot of User Interface effort has been put into ensuring users could get logged in and their accounts setup very quickly.

I asked founders Bosco Tan and Alvin Singh a few questions about the journey so far.
Bosco Tan & Alvin Singh

Bosco Tan & Alvin Singh

What been the hardest thing?

The absolute hardest thing and the thing that we continually focus on is building something that people want and care about. Everything we do is focused on that.
Finance is not a ‘sexy’ topic for the average person and so we try to build something the cuts through the status quo and delights our users. Every feature, every item that goes into Pocketbook is critiqued and we are the biggest critics of ourselves. More often than not features are sidelined because it doesn’t fit in with the vision we have for Pocketbook.

What surprised you?

What continues to surprise us is the diversity of users that email us and tell us how they are using Pocketbook. And it’s across the whole spectrum. We have CEOs of ASX listed companies, 65 year old retirees, high school students, stay at home mums to young professionals contact us. We are constantly talking to our users which help us guide our compass – it’s one of the more important things we do.

Can you tell us how many users or at least a growth factor?

We’ve had a huge response from the Australian community. We’re growing at over 10% month on month.

Have you got any good startup war stories?

Thats a timely question because we just launched our iPhone app and we had a couple of sleepless nights.
Pocketbook Iphone App

Pocketbook Iphone App

It’s always hard to estimate demand of something when your not sure how people will take to it and how they will use it. So when we launched our iPhone we immediately hit the top 10 apps in finance and continued the climb to number 2 – beating apps such as Paypal, all the banking apps from CBA, Westpac etc., Kaching. This had a huge impact on server traffic and that morning we watched our server hitting max usage for a few hours.
Immediately we went into red-alert because we wanted everyone trying Pocketbook app for the first time to have a delightful experience and not have to experience slow response times. Luckily we are with a great hosting provider and can scale at will – adding extra CPUs and RAM to our servers. In a couple of hours we had scaled up and were humming along.
Lesson – have your finger on the scale button as needed and be ready for it.

Are you at the point where you need to think about scaling and architecture issues?

Yep – war story! Alvin was a senior architect at News Ltd in his corporate life so he has experience working on systems handling hundreds of millions of records and a huge amount of traffic. So all those learnings have been built into Pocketbook.

What mistakes have you made?

We don’t feel like we’ve made many big mistakes to date. It’s been pretty smooth.

We debate a lot – pros and cons about features, what platforms to be on, which banks to support etc. We let our users guide us a lot of the time. We get about 50-80 bits of email on a daily basis with great feedback and suggestions, we created a voting page for banks our users want added – https://getpocketbook.com/addmybank, and finally it’s always great to run into our users at events and take feedback in person.

What have you really done well?

We think we’ve done well to capture usability. Alvin and I are pretty average consumers – we hate having to do accounting and we both value our spare time – these things we suspect are pretty universal for most Australians. With this, we designed the product for people just like us. The web interface is for quick planning on the couch or the kitchen table, and the mobile app is for on the run – those couple of minutes at the supermarket or that morning train ride to work.

What we found was that most current personal finance products out there fall into two camps – they’re either for the sophisticated amateur accountant, or they require too much manual entry. So we set out to be different, if you know how to check your friend’s status updates on Facebook or if you know how to check your balance on internet banking, you should be able to budget with Pocketbook.

Whats your next big milestones?

We got a few exciting things coming up. From a product perspective, we just launched our mobile app on iPhone to an amazing response . We’re working on the next big request – an app for Android. It’s tax season, and we’re working on something to simply the process of doing tax returns – in fact, that’s where the product originated. Some info here – https://getpocketbook.com/features/tax-returns-2013

 

Aside from product, we’re closing our round of funding so we can move even faster. We’re also competing in the finals of the SWIFT Innotribe 2013 Startup Competition in Dubai this September. SWIFT is a financial messaging cooperative between 15,000+ banks globally. Think “SWIFT Code” whenever you transfer money overseas. So this is recognition at the highest level in our sector. Of the 9 companies competing, we are one of 3 representing Asia-Pac and the only company from Australia. You can read more here: http://innotribe.com/2013-grand-finale/