John Mullins knowledge and work at Harvard Business Review (HBR) have been discussed here previously in Cash – How Fast Can Your Company Afford to Grow? His book, The Customer Funded Business was the topic of his presentation at the Dallas Growth Summit.
Mullins shared five models to achieve a customer funded business. Much like John Warrillow, who wrote The Automatic Customer, and presented at the Orlando Growth Summit (see John Warrillow, The Automatic Customer – Orlando Growth Summit, and Recurring Revenue Streams II – Automatic Customer – Growth Summit) these ideas are extremely valuable. If you haven’t discovered how to bring a steady stream of recurring revenue into your business, I’d strongly suggest you consider these strategies and tactics. It not only gives your business an appreciable advantage in cash flow, it also significantly increases your business equity and purchase price at the time you want to sell.
For each model, Mullins provided a story to illustrate the model.
In 2008, the Democratic Convention was coming to Denver and they were struggling to pay the rent. They got 3 air mattresses and rented their room for $80 each. The rest you could say is history. You can view this short two minute video to learn more about how Airbnb started and progressed. Interesting story is how they got their first seed money ($30K) was not renting space but selling Obama O’s cereal.
Customers Fund Turnaround
Bill Sahlman, Professor at Harvard Business School suggests, “The best money comes from customers.” Indeed Mullins believes that the customer is not just “king” as the saying goes, but the customer can be your venture capital source.
Mullins shared a story for a company Ryzex. Facing a $3M cash flow deficit they searched for answers by looking at how their customers could provide the cash they desperately needed. Through a series of steps they were able to turn their deficit into a cash abundance. These steps included:
- Offering current customers a discount for paying in advance
- Providing a maintenance membership for customers paying annually a year in advance
- New customers leasing equipment versus purchase (leasing company’s pay full amount to Ryzex within 3 days of agreement, while Ryzex pays their vendors 57 days later)
Ryzex turned that $3M deficit into a $6M cash advantage in just 17 months.
Drawbacks to Venture Capital
Mullins noted that there are some serious drawbacks to business funding from venture capitalist. Among these are time, and the fact that 75% of the company’s receiving capital fail to every return the money invested in them.
Venture Capitalist expert Fred Wilson discovered the more money you raise early for your business through venture capital the less likely you are to succeed. Mullins had us discuss why this happens at our tables. The most frequent suggestion is that having the money early means the company fails to invest it wisely, or takes unnecessary risks with this money rather than being more frugal and meticulous in their spending.
Finance a Start-Up?
Mullins provided a compelling example of how one entrepreneur funded his new restaurant before he opened it with his current customers. While still working as a chef at his current restaurant he approached customers who loved his meals. Asking these good customers to purchase 10 dinners for ten people in advance for his new restaurant, he was able to gain the financing from this alone to start his new venture.
Might this idea work for you for a new venture?
Mullins five models
Here is John Mullins short synopsis on the five different models for customer funded businesses:
- Matchmaker Model: What would it take for us to bring buyers and sellers together in our market and industry without ever touching or taking ownership of what’s bought or sold? How can we get our current competitors to play ball?
- Pay in Advance Model: For what reason might it be in our customers’ interest to pay us faster, in advance of delivery, than they pay us now? How can we convince them to do so? What’s in it for them?
- Subscription Model: For which of the product lines (or services) we now sell would it be in our customers’ interest to buy on a subscription basis instead of repetitively, as they do now? How can we convince them to do so? What’s in it for them? How might we make (and finance) the transition?
- Scarcity model: For which of the product lines (or services) we now sell could we limit the supply and pricing in order to create urgency to buy?
- Service to product model: If we’re in a service business, which of the lines of business that we now deliver as a service could we ‘bottle’ or ‘package’ and deliver without any material level of human support?
All Five Models: For what reasons might it be in our most important suppliers’ interest to allow us to pay them slower than we do now? How can we convince them? What’s in it for them?
Is cash flow an issue for your business. We’ll be discussing ideas to improve your businesses cash flow at our November 11th Scaling Up Workshop in Cedar Rapids, IA, Join us to learn more how to scale your business for growth in 2016.
Who wouldn’t like to do twice the work in half the time. Jeff Sutherland is the author of a book title by this name. You may have heard of his methods by another name, “Scrum.” That’s our next blog from the Dallas Growth Summit this coming Monday.