Funding without Venture Capital

Raising capital for startups is one of the most challenging tasks that entrepreneurs experience during their journey. Meeting angels, asking for seed money, and raising capital in each investment round do not usually end up as they expected. Meanwhile, these entrepreneurs are forgetting the bigger opportunity of funding their startup without even needing any external investors.

Several successful companies like Airbnb, Dell, Banana Republic, and many more, have built and financed their startups without bringing in any Venture Capital at least at the beginning nevertheless not forever. They all used what is called consumer or Customer Funding Models.

Even if you intend or need to bring in investors and external capital in your company, it is a delicate task to convince the investors about your idea which most of the time will not result in an instant approval (especially in early stages). Starting your finances based on customer funding models, even if it results in a very small amount of investment, is the best prove of concept and adds more credibility to your idea.

Besides the complexity of early stage funding and its problems before having a solid prove of concept, according to the researches and statistics, three out of four venture capital backed companies fail to return back the investment and only one in ten startups who take in VCs succeed to deliver anything close to the initial plan and keep their promises to the investors without some deviations.

(Image source: Harvard Business Review)

Customer Funded Business Models

Customer based funding models

Pay-in-Advance:

This is the most straightforward and easy to apply amongst all customer funded models. It is applicable in consulting, service provider, production, repair & maintenance, and any other type of business that customers would pay in advance.

Dell, Costco and Amazon Prime are good examples for businesses who successfully adopted and implemented this model. Depending on the nature of their business, marketing strategy and business model, companies using Pay-in-Advance may ask the customers to pay for the whole or part of the price before receiving any services or products. payinadvancemodel

If customers start to pay you in advance, they are not trying to be nice and tell you that they liked your idea. It also indicates that you have identified a correct correlation between your business and customer needs. If the customer is not willing to put an order or partially make some advance payments, then maybe your idea is not that good after all or you need to reconsider the customer’s need or problem that you have identified. In any case, it is better to learn this earlier rather than later and after having wasted your resources.

 

Matchmaker or Marketplace:

In this funding model, the entrepreneur or company is matching an existing supply with an existing demand in the market. The company is not buying or selling any goods or stuff and does not keep an inventory. It just provides a platform, which could be physical or digital, to match the buyers-sellers, suppliers-consumers, services-clients and so on.

If you think for a moment, this funding model will sound familiar with multiple businesses that use this model to keep their finances in order. Airbnb, Uber, Trivago, TaskRabbit, Freecycle, and hundreds of platforms for selling second-hand stuff, tickets, phone cards and so on. These businesses earn money by providing a suitable environment for supply and demand resources to find each other and do a business transaction so the platform owner can earn by cutting a margin from one or both sides. matchmakermodel 

While this sounds to be a very simple but interesting model, it is very important to use it wisely and see if it actually fits in your business, should you start locally and in small scale or in a bigger scale and even globally, which channels to use for marketing and how to build trust in early stages.

 

Subscription:

As it is obvious from this model’s name, it is based on getting upfront payments on regular basis in order to deliver a service or product on a pre-agreed terms and periods. This funding model strongly helps businesses to construct a predictable and guaranteed revenue as long as the customers are willing to continue the subscription. subscriptionmodel

You can find so many businesses that are using this model nowadays. From music platforms, internet providers and software licences to clothing items, groceries and beauty products. One important factor in implementing this funding model is to have a realistic market analysis. Otherwise it will not work out as long as you cannot answer a real customer need or in other words you will not get any subscriptions. For example, Manpacks which was trying to sell monthly subscriptions for men’s underwear products didn’t pay attention to the point that how often men buy underwear or sucks actually!

 

Scarcity-Based:

The scarcity funding model (especially in retail business but not limited to it) is perhaps the cleverest model here since it actually helps you to earn more by selling less! This could happen by taking advantage of the fact that vendors usually do not get paid in advance by retailers. However, this model could also be the most difficult one to implement successfully because while it can bring in the flow of customers’ cash in your business, it is difficult to keep it profitable over the long term.

In Scarcity-Based funding model, what is for sale is restricted by the seller to a limited quantity over a limited period, with no re-orders while the seller’s suppliers are paid long after the sales are made. In other words, the seller offers a specific group of products for a limited time only. After that, the product and sales will discontinue, and it is done and gone. scarcitymodel

This method is used by both physical retailers and online platforms. Many brands are using this method to increase their sales and cash flow like Zara, Prada, Gucci and even a restaurant in Austin Texas called “Franklin’s BBQ”.

Some businesses also made smart and innovative moves by combining Scarcity-Based model with other business models. For example, Revolut has made a successful business model by jointing Scarcity-Based and Subscription funding model for some exclusive services. Not only they made more sales by selling less but also, they secured a recurring revenue.

 

Service-to-Product:

This model which has successfully been implemented by companies like Microsoft, is about building a product out of the services that your company provides.

Businesses offering services, especially consulting companies, can widely use this funding model together with a subscription, pay in advance or other customer funding models as well. For example, in Microsoft’s they provided standard OS programs with standard price setting strategies and at the same time they offer custom designed OS software for specific clients.

Any type of services which you can make standard bundles for them, could be offered as products. It may include a free of charge or a very low-cost initial package and multiple complementary or advanced products for advanced clients.

When your clients know exactly what they are paying for and what they will get by purchasing a specific service package as a product, it will remove their general confusion regarding the services that you provide. Service-to-Product model helps you to generate a safe ground of usual customers while you still have the opportunity to offer extra or other tailor-made service packages for advanced product.

To take out:

As a conclusion, it must be mentioned that if a business, especially a startup, is implementing Bootstrapping method in their expenses and simultaneously applying customer funding models to generate revenue, they will eventually gain three big advantages as follows:

  1. They will minimize the risks. This could be achieved by reducing the size and capacity of required resources to kick start and drive the business. These resources of course include investment funds or start capital in great extents.
  2. They will maximize the potential awards. Comparing the pay back duties of the businesses backed with VC investment, customer funded businesses will capture and enjoy the bigger amounts of incoming revenue since there are no shares or duties to pay back.
  3. They will maximize their freedom of choice. Even though the investors or VCs come into your business with money, the may (usually) have their own agenda which can influence your initial idea or business model. If you are a customer funded business, the only party that you have to answer to, is your customers.

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