use customer cash to finance your start-up

7/27/2019 Use Customer Cash to Finance Your Start-Up

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Use Customer Cash To Finance

Your Start-Up

July-August 2013

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John Mullins

By

D.Ravi Varma (B605)


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About Author:

John Mullins.

He is a Standford MBA and Ph.d.

At present he is the faculty atLondon Business School.

His teaching subjects include

Financing the entrepreneurialbusiness, Business plan

developement and many more..

Getting to plan-B was his majorachievement.

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What do You mean by

Start-up?

The money that is required to start

a new business.

Toptomato.in Hifives.in

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Coming to the world of

Entrepreneurship Airbnb is one of the most celebrated start-ups of the past decade.

In 2007 two design school graduates dusted off some air

mattresses and rented out space in their San Francisco apartment

to conference attendees who couldnt find hotel rooms, netting

$1,000.

By 2012 Airbnb had raised $120 million in venture funding and

was valued at more than $1 billion.

The business model is structured so that advance customer cash

helps finance growth.

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Its a strategy more new businesses should consider: receiving

cash from customers before having to lay out money for the

product or service to be sold.(Negative Working capital).

One of the biggest benefits of doing so is that it allows

company founders to focus on creating, testing, refining, and

proving their business models instead of on courting

investors.

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Customer-funding model is especially helpful when traditional

forms of financing, such as bank loans, are tight, as is the case

in many markets right now.

Discover a Better Form of Financing

Many start-ups spend too much time looking for financing

and invest too much money in prototypes or inventory.

Some entrepreneurs avoid those traps by adopting business

models that give them advance access to customers cash as a

means of funding early growth.

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The Matchmaker Model

Some companies entire business models consist of

connecting buyers and sellers.

These companies do not have inventories and the cost of

goods sold is extremely low.

Example : Ebay and Expedia.

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The Deposit Model:

In deposit model the company initially accepts deposits from

public and render the services as and when recquired by the

customer.

A classic example is the travel start up Flight Raja (Now Via)

which used this model .

Initial deposit of $5000 from travel agents.

Within 2 months it had signed up 180 agents booking 200

tickets a day.

After 1 year it had signed up 3000 agents in 290 cities.

By 2012 annual revenue crossed $500 million.

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The Subscription Model:

Customer pay a predictable monthly fee in advance, the

business is high capitalefficient and it enjoys smoother

revenue growths than most start ups do.

In 2005 Krishna Ganesh hired 3 teachers in Bangalore.

Newspapers and cable networks have used subsciption

models for many years.

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The Standardize And Resell Model

Start-ups leveraging this model develop technology or

systems that do what people have been doing manually in

labor intensive businesses .

This strategy relies on offering a customer the process so they

no longer have to do the process manually and have them

provide a contract that finances your developing the tech or

process yourself.

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The Scarcity Model

Companies leveraging this model use scarcity to motivate

customers to pay and buy early and quickly.

This tactic takes advantage of the situation that retailers

normally have credit with their vendors.

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Conclusion

Each of these models allowed company founders to launch

with little or no external financing and to use the time not

spent seeking potential investors to fine tune their business.

Customer funded models dont suit every venture . Capital

intensive projects that recquire manufacturing plants other

infrastructure must almost always relay on traditionalfinancing.

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use customer cash to finance your start-up

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