Should business angels be an entrepreneur’s first port of call?
This article is provided by the Deloitte Institute of Innovation and Entrepreneurship.
More than two generations ago, the venture capital community convinced the entrepreneurial world that writing business plans, raising angel funding, and then following with venture capital constituted the holy triad of entrepreneurial behaviour.
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 never take any angel or venture funding. Are they on to something that most of today’s entrepreneurial ecosystem has missed? Indeed, should a business angel be seen as the first port of call for getting your nascent entrepreneurial venture off the ground? Perhaps not.
Fortunately, there exists another approach. Most fast-growing companies, at least at the outset, and sometimes for the entire journey, get the cash they need from revenue – not costly equity 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. Here are just a few:
There are five time-tested but largely unknown approaches that scrappy and innovative twenty-first century entrepreneurs have ingeniously adapted from their predecessors – like Michael Dell, Bill Gates, and Banana Republic’s Mel and Patricia Ziegler. What Dell, Gates, and the Zieglers have in common is that they all started and grew their companies largely with their customers’ cash. Here’s how they and many others have done it:
If you are an angel investor I suggest you ask those seeking your capital to put one or more of these models to work. “Come back when you’ve got customers (even before producing the first product),” you should say, “and I’ll then help you grow.” Customers first. Angels second.
If you’re an aspiring entrepreneur lacking the startup capital you need or an early-stage entrepreneur trying to get your cash-starved venture into take-off mode, a customer-funded approach offers the most sure-footed path to starting, financing, or growing your business. In the words of Shanghai’s entrepreneur and angel investor Bernard Auyang, “The customer is not just king, he can be your VC too!”