Capital Customer

Starting a company? Consider using your first customer as an ersatz incubator. That's what Scott Mitchell did to get his business, Learning Productions, in Tempe, Ariz., off the ground. The company sells training software that simulates real business experiences. Its first customer -- Avnet Computer Marketing Group, in Tempe -- actually provided Mitchell with all the resources he needed to incubate the company.

Avnet first suggested the arrangement to Mitchell more than two years ago. Mitchell and his cofounder, Steve Goodman, were at what they thought would be just a run-of-the-mill exploratory sales call for their then-unwritten software. "Imagine walking into a room of a Fortune 500 company," says Mitchell, a former Andersen consultant. "You pitch the product and see people's heads nodding. The meeting culminates not with their saying, 'That looks great,' but saying, 'When can we start?' But then you tell them that actually you're still looking for money. And they look you squarely in the eye and say, 'You have nothing to worry about.'"

Before that conclave, Mitchell thought he would need to raise $1.5 million in private equity and then look for venture capital. But Avnet consented to lending Learning Productions office space in addition to providing access to its computer network and sharing its equipment. Avnet even went so far as to cover Learning Productions' first payroll and absorb the cost of its employee benefits. "We got at least a three-month jump start," Mitchell notes, "and the whole game nowadays is speed to market."

As Learning Productions grew to 30 employees and three clients, Mitchell says that he discovered some drawbacks to working intimately with one client. For one, it's tough to spark your own start-up culture in a corporate, cubey environment. "We couldn't decorate the office with cool brushed aluminum," he says.

Although resources are the first, and most obvious, motivation for this sort of deal, Mitchell says the strategic reasons are even more compelling. "It's less about the money and more about your product and idea being validated as you develop them," he says. "A lot of companies start up with an idea, hoping it's what the client needs. By having our initial financing come from our initial client, we knew our product was going to be useful."

Though he won't say how much Avnet actually gave Learning Productions (or how much equity Avnet received in return), Mitchell does say that the surprise windfall enabled him to keep start-up costs below $150,000 for the first few months of operation. And in April he sold the business to Smartforce.com for what amounted to a tidy $16 million. Now he can afford all the brushed aluminum he wants.

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