When the going gets tough, consider customer funding

LBS’s Dr John Mullins argues the case for start-ups to use customer funding to build brand excitement and fund early-stage businesses

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Tough going for tech start-ups as enterprise investment plummets’ (The Times, 21 May, 2022) quotes the UK’s largest investment service for high net worth and experienced investors, the Wealth Club, that “investor sentiment is down across the board”. The article goes on to report that venture capitalists are also steering clear of start-ups, “questioning valuations of start-up companies, or exerting pressure on the firms they invest in to improve their profits.”

John Mullins, Associate Professor of Management Practice in Marketing and Entrepreneurship, LBS, responds:

The deteriorating economic outlook and fading appetite for growth companies is blamed. Yet whatever the state of the economy, it is self-evident that any venture-backed company might one day find it hard to secure follow-on investment if the excitement in the company begins to cool. What, then, to do when more funds are required? Happily, there remains a little-talked-about but much more agreeable and hospitable source: customers who are eager to buy what the company offers, and, sometimes, pay in advance.

Business luminaries such Michael Dell, Bill Gates and Banana Republic’s Mel and Patricia Ziegler used customer funding to get their companies up and running. Tesla, too. Tesla founders Elon Musk, Martin Eberhard, JB Straubel, Marc Tarpenning and Ian Wright were visionaries who knew next to nothing about building automobiles, and the road ahead would prove to be littered with potholes. But they got one thing very right. They asked for payment up front, sometimes a deposit, sometimes in full. The first-generation Tesla Roadster, with its $112,000 price tag, meant it was always going to be a car for the very selective few. If you wanted one, you not only had to pay well in advance, but you had to wait, too.

Clearly, ingenious entrepreneurs need not be deterred by bleak headlines. Instead, they should make certain that what they offer is sufficiently compelling so that their got-to-have-one customers will pay them today for something that gets built and delivered tomorrow. Such an approach will surely mitigate, and perhaps eliminate, the need for scarce and costly venture capital. Who needs investors, anyway?

John Mullins, Associate Professor of Management Practice in Marketing and Entrepreneurship, LBS.