Customer Satisfaction Pays

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Let's face it: Frada Silver's company hardly sounds like a venture capitalist's dream. Silver makes a product whose heyday passed decades ago. Her machinery dates from about 1910 (some is so old it was originally bicycle powered). And, she says, nobody in the country manufactures her packaging containers, leaving her forced to scavenge them from defunct competitors.

It's little wonder then that Silver couldn't get conventional financiers to fund the start-up of The Seltzer Sisters, her Redwood City, Calif., seltzer-water home-delivery business. But as a sales rep for Seltzer Sisters' predecessor company, Silver knew that the product -- delivered in hand-blown, old-fashioned syphon bottles -- had a strong nostalgic appeal to a well-heeled clientele. So when the previous owner wanted to sell out in 1985, Silver turned to those patrons for help. Through a private placement focusing on her customers, she sold 19% of the small company to about 20 investors. With the money she raised, Silver was able to make her down payment on the equipment -- and Seltzer Sisters was born. Since then, business has tripled, and Silver hopes to branch out into operating sweet shops and selling water filters.

Such customer-based financing is very rare, according to William E. Wetzel Jr., a University of New Hampshire professor who studies informal venture capital sources. But for entrepreneurs who have an established, affluent customer base, it may be a smart tactic. Good customers can be good prospects in the search for investors. "You've got a recognition factor there that is often hard to build up," Wetzel notes.

Certainly Silver's investors were influenced by their knowledge of the company and its president. But the clincher may have been this: Seltzer Sisters is the only home-seltzer distributor in northern California. Though textile designer Sondra Alexander says she wouldn't have put in $5,000 if she hadn't had confidence in the business, she admits she had another incentive as well. "I thought, 'My goodness, if we don't invest and she goes out of business, how in the world are we going to get our seltzer?"