More than two generations ago, the venture capital community--VCs, business angels, incubators, and others--convinced the entrepreneurial world that writing business plans and raising venture capital constituted the twin centerpieces of entrepreneurial endeavor. They did so for good reasons: the sometimes astonishing returns they've delivered and the incredibly large and valuable companies that their ecosystem has created.
But the vast majority of fast-growing companies don't take venture capital, at least at the outset. Are they on to something that most of the players in today's entrepreneurial ecosystem have missed?
Is there an alternative to VC?
There are five inventive approaches to customer funding that scrappy and innovative 21st century entrepreneurs have ingeniously adapted from their predecessors. Entrepreneurs like Michael Dell, Bill Gates, and Banana Republic's Mel and Patricia Ziegler grew their companies (at least initially) largely with their customers' cash.
"Easy for the likes of Dell, Gates, and the Zieglers," you may be thinking. "But could I do it in my business?" In many cases, you can! Here's how.
- By bringing together buyers and sellers, but not owning what is bought and sold, today's matchmakers build great companies with virtually no startup capital. For Airbnb, the initial investment in 2007 was for a couple of air mattresses on the founders' San Francisco apartment floor. By narrowly focusing on conventions that were too big for the city’s hotel inventory, Brian Chesky and Joe Gebbia built their business one step at a time until they got noticed at the Democratic National Convention in 2008. VC funding eventually followed, and the rest is history: 800,000 properties in more than 190 countries.
- Bangalore's Vinay Gupta built Via into the "Intel Inside" of the Indian travel industry. How? By asking India’s mom-and-pop travel agents for a rolling $5,000 deposit in advance in return for real-time ticketing capability and better commissions than the airlines were giving them. Do the math: 200 agents in his first few months in 2006 gave Gupta $1 million in cash with which to start and grow his business. By 2013 its revenue had soared to $500 million.
- Krishnan Ganesh started TutorVista in 2005 with three Indian teachers and a VoIP Internet connection, reaching American teens who needed help with their homework. He quickly learned that $100 per month for "all you can eat"--paid in advance--was just what the teens’ parents wanted. When renewal rates after the trial subscription quickly materialized at north of 50 percent, growing the business was simply a matter of adding more fuel. He sold the business to Pearson in six short years for more than $200 million.
- Jean-Jacques Granjon and his partners created the flash-sale phenomenon by doing something simple for Parisian designer apparel makers who needed to move unwanted inventory. By collecting payment from members who responded to short time window, limited quantity available, and discounted prices, and paying his vendors long after the goods had been ordered and shipped, Granjon didn't need any capital to start or grow what became one of France’s hottest fashion brands.
- Claus Moseholm and Jimmy Maymann of GoViral, a Danish company created in 2003 to harness the then-emerging power of the Internet to deliver advertisers’ video content, funded their company with the proceeds of one successful viral video campaign after another. In 2011, after having turned their service business (creating and hosting viral video campaigns) into a product platform that stood on its own (hosting and measuring the reach that the ads achieved), GoViral was sold for $97 million, having never taken a single krone or euro of investment capital.
The way forward: Lessons learned
Whether you're an early-stage entrepreneur, an angel investor, a mentor, or a business accelerator professional, a customer-funded approach may offer the most sure-footed path to starting, financing, or growing your business or one you support. In the words of Shanghai's entrepreneur and angel investor Bernard Auyang, "The customer is not just king, he can be your VC too!"