Funding

Second Thoughts on Venture Capital: Should a VC Be an Entrepreneur’s First Port of Call?

October 15, 2019

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 center pieces of entrepreneurial endeavor. They did so for good reasons: the sometimes astonishing returns they’ve delivered to their investors and the incredibly large and valuable companies that their ecosystem has created. But the vast majority of fast growing companies never take any venture capital.

Why raising early VC is a bad idea

Too many of today’s entrepreneurs have come to the belief that the best way to start and grow a thriving business is to come up with a great “idea”, write a great business plan, raise capital from angels or VCs, flawlessly execute the plan, and (Voila!) get rich! But it hardly ever happens this way, and the vast majority of successful businesses don’t ever raise venture capital. Instead, at least at the outset, and sometimes for the entire journey, they get the cash they need from their customers.

They don’t do so because it’s easier, though.It’s not. They do it in large part because of the unwelcome drawbacks entailed in raising capital too early. (See the table)

But is there an alternative?

What doMichael Dell and Bill Gates have in common? Each of them started and grew their companies largely with their customers’ funds. Here’s how they and many other shave done it:

·      Matchmaker models (for example, eBay,Airbnb)

·      Pay-in-advance models (Dell)

·      Subscription models (India’s TutorVista,SalesForce.com)

·      Scarcity models (Spain’s Zara, France’s VentePrivee)

·      Service-to-product models (Microsoft,Denmark’s GoViral).

Whether you’re an aspiring entrepreneur lacking the startup capital you need, an early-stage entrepreneur trying to get your cash-starved venture into take-off mode, a corporate leader seeking to grow an established company, or an angel investor, mentor, or business accelerator or incubator professional who supports high-potential entrepreneurial ventures, a customer-funded approach offers the most sure-footed path to starting, financing, or growing your business or those 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!”

Still wondering if it is possible to run a successful business without external funding? Find out more from@John_W_Mullins himself at our Nov 12th Investment Conference happening at Cocoon Global from noon to 19:30

Learn more and purchase tickets here: https://bit.ly/2KIu0iI

Author:

John Mullins, a two-time entrepreneur and an associate professor at London Business School. He is the author of three best-selling books on entrepreneurship, The New BusinessRoad Test, Getting to Plan B (with Randy Komisar), and his newest book, from which this article is adapted, The Customer-Funded Business: Start, Finance, orGrow Your Company with Your Customers’ Cash.

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