What are ways to finance and grow my start-up without VC? originally appeared on Quora - the knowledge sharing network where compelling questions are answered by people with unique insights.
Answer by John W. Mullins, professor at London Business School, on Quora.
This answer's a long one. Here we go. A long-held notion in entrepreneurial circles is that the way to start and grow a thriving business is to come up with a great "idea", write a great business plan, raise capital from angels or VCs, flawlessly execute the plan, and (Voila!) get rich! But it hardly ever happens that way, as the vast majority of fast-growing companies - likes those on the Inc. 5000 list - never raise venture capital.
So, should venture capital - whether from VCs, business angels, incubators or others - be seen as the first port of call for getting nascent entrepreneurial ventures off the ground? Perhaps not. As venture capital investor Fred Wilson of Union Square Ventures observes, "The fact is that the amount of money startups raise in their seed and Series A rounds is inversely correlated with success. Yes, I mean that. Less money raised leads to more success. That is the data I stare at all the time." "But is there an alternative?" one might ask? Remember Michael Dell?
Michael Dell's Customer-Funded Origins
These days, everybody knows that Michael Dell started Dell in 1983 in his University of Texas dorm room, selling made-to-order PCs mostly to small businesses. What most don't realize, even today, is that a core precept in the business was that Dell always asked his customers to pay in advance. With his customers' cash in hand, Dell was then able to buy the necessary parts, hire his college buddies to assemble them or add them to basic PCs that Dell would upgrade to meet its customers' specs.
With his customers' cash in hand, combined with the well-honed selling skills he'd been developing as a teenager selling newspaper subscriptions to The Houston Post, Dell didn't need a dime to start his business. It wasn't until he wanted to develop a super-fast model to take on Compaq and IBM, well into his journey, that he raised $300,000 from his parents for some basic R&D.
Pay-in-Advance: One of Five Models
What Dell, and many others like him, have figured out is that starting, financing, and growing a company with his customers' cash, instead of investors', is a far more appealing way to go. "Easy for the likes of Michael Dell," you're wondering, perhaps, "but could I do it in my business?" In many cases, you can! Surprisingly, there are five ways - five tried-and-tested, customer-funded models - with which to do so. How?
- Pay-in-advance models: Bangalore's Vinay Gupta built Via into the "Intel Inside" of the Indian travel industry. How? By asking India's mom-and-pop travel agents for a rolling $5,000 deposit in advance in return for real-time ticketing capability and better commissions than the airlines were giving them. Do the math: signing up 170 travel agents in the first two months gave Gupta nearly $1 million in cash - his customers' cash - with which to start and grow his business! Just like Michael Dell, but with a 21st century twist!
- Matchmaker models: By bringing together buyers and sellers, but not owning what is bought and sold, matchmakers build great companies with virtually no startup capital. For Airbnb, the initial investment in 2007 was for a couple of air mattresses on the founders' San Francisco apartment floor. By narrowly focusing on conventions that were too big for the city's hotel inventory, and by generating revenue by bringing together people having spare bedrooms (and more!) with those who wanted to rent them, Brian Chesky and Joe Gebbia built their business one step at a time until they got noticed at the Democratic National Convention in 2008. VC funding followed, and the rest is history: 800,000 properties for rent in nearly 200 countries!
- Subscription models: Krishnan Ganesh started TutorVista with three Indian teachers and a VoIP internet connection reaching American teens who needed help with their homework. He quickly learned that $100 per month for "all you can learn" - paid monthly in advance - was just what the teens' parents wanted. When renewal rates after the trial subscription quickly materialized at north of 50 per cent, growing the business was simply a matter of adding more fuel. VC funds provided it, and Ganesh sold the business to Pearson in six short years for more than $200 million.
- Scarcity models: Jean-Jacques Granjon and his partners created the flash-sales phenomenon by doing something simple for Parisian designer apparel makers who needed to move unwanted inventory. By collecting immediate credit card payment from his members who responded to the limited 3-day online sales and limited quantity available at discounted prices, and paying his vendors long after the goods had been ordered and shipped, Granjon didn't need any capital to sell their unwanted styles online and to start and grow what became one of France's hottest fashion brands. Unfortunately, there have been far too many imitators to make flash sales a good business, and most flash-sales businesses have struggled to reach profitability.
- Service-to-product models: Claus Moseholm and Jimmy Maymann of GoViral, a Danish company created in 2003 to harness the then-emerging power of the internet to deliver advertisers' video content in viral fashion, funded their company's startup and growth with the proceeds of one successful viral video campaign after another. In 2011, after having turned their service business (creating and distributing viral video campaigns, and making them both targetable and measurable) into a product platform that stood on its own, GoViral was sold for $97 million, having never taken a single krone or euro of institutional capital.