What’s the ideal way to fund a new business or grow an existing one?
How about having customers provide all or most of the necessary capital.
While this scenario may not be realistic for some companies, many companies can find practical application of this method in their approach to capital and customer acquisition. This is the essence of value creation capital.
The primary question is:
How lean can a company start and operate in order to attract paying customers with an early version of its products or services, thereby demonstrating viability, scalability, and fundability?
After a business has demonstrated these characteristics, it’s a lot easier to get funding, because the investment is less risky.
This idea is not new or uncommon. For many years 3-M has fostered a culture of intrapreneurship whereby small teams of technical and business people come together on a limited budget to develop and market new products. Some industry experts estimate that 30% of all large companies provide seed funds to finance internal entrepreneurship today.
Many entrepreneurs could take a page from this playbook for their own companies. In other words, start making money from a small investment in product development and marketing, consistently improve the product based on market demand and reasonable economics, and raise growth capital after establishing a respectable product, delivery and support team, customer base, and growth plan.
One of the key elements to this lean approach is focusing on the creation of “minimum viable products,” and then building a base of paying customers. This approach has also been around a long time. In the automotive industry, both Honda and Hyundai came to market in the United States with cars that could easily be classified as minimum viable products. They sold a lot of these cars at low prices, which provided revenue and a growing customer base on which they could continuously improve. Both car companies have a much better reputation today than they originally did, and they are still going strong, even amid global economic challenges.
I’ve worked with many startups that wanted to hit the market with a knockout product or service from the very beginning. Few have achieved their fully realized vision out of the starting gate. Many find that the perfection curve can be a real business killer for tender young companies with limited financial resources. I’ve experienced this brand of misery firsthand with one of my own startups, and don’t recommend it to anyone!
Venture capitalists and other investors are coming around to this way of thinking again – spend less upfront to develop products and customer bases, and then fund the winners that emerge. It’s a simple lesson with major implications. It’s also a mindset and a strategic approach that can help you quickly and economically sift through many good business ideas to find a really great one customers love to pay for.