The Customer-Funded Revolution: An Interview With John Mullins
A vast majority of fast-growing companies are relying on customers’ cash – and not venture capital – to succeed. How are they doing it? London Business School Professor and NEN Faculty Advisor John Mullins has the answers in his latest book The Customer Funded Business.
A former entrepreneur, and now an award-winning professor at London Business School, John Mullins is the author of two best-selling books, as well as dozens of case studies on real-world entrepreneurial companies. While his first book, The New Business Road Test: What Entrepreneurs Should Do Before Launching a Lean Start-Up, has become the definitive work on assessing entrepreneurial opportunities, his second book Getting to Plan B: Breaking Through to a Better Business Model has won critical acclaim for providing entrepreneurs a field-tested process to build economically-viable business plans.
Now in his latest book, The Customer-Funded Business, John authoritatively demonstrates how a vast majority of fast-growing companies has relied on customers – not venture capitalists – to succeed, and provides entrepreneurs a comprehensive frame-work to build cash-generating businesses. In this interview with NEN, he talks to us about some of the critical concepts he covers in his book.
Why should today’s entrepreneurs adopt a customer-funded approach?
The best reason is that it sharply reduces risk. And it lowers the cost of failure, too. Failure is an important source of learning for entrepreneurs, but what you want to do is fail fast, and fail inexpensively. Taking a customer-funded approach will force you to find out – early! – whether customers are going to buy or not. That’s something most entrepreneurs would like to know! But that’s not all.
“Failure is an important source of learning for entrepreneurs, but what you want to do is fail fast, and fail inexpensively. Taking a customer-funded approach will force you to find out – early!”
Getting cash from customers to support the establishment of a business is extremely helpful for several other reasons, too. First of all, it eliminates the need to spend precious time and energy attracting investment capital, which is a real distraction. Doing so also avoids the often-draconian terms that early stage investors typically require if they are to part with their money. And focusing one’s funding efforts on customers’ instead of investors can mercifully put to rest an idea that just isn’t going to cut it in today’s competitive marketplace.
Could you explain the five customer-funded models articulated in The Customer-Funded Business and how you arrived at this set of ideas?
First of all, getting customer funding isn’t new. It’s exactly what Michael Dell, Bill Gates and Banana Republic’s Mel and Patricia Ziegler did to get their companies up and running and turn them into iconic brands. Based on nearly years of research, I have uncovered five novel approaches that scrappy and innovative twenty-first century entrepreneurs have ingeniously adapted from their predecessors like Dell, Gates, and the Zieglers:
Matchmaker models (for example, the U.S. companies Airbnb and DogVacay)
Pay-in-advance models (the USA’s Threadless, India’s Via and Loot)
Subscription models (India’s TutorVista, the USA’s H.Bloom)
Scarcity models (Spain’s Zara, France’s vente-privee, the USA’s Gilt Groupe)
Service-to-product models (Denmark’s GoViral, Puerto Rico’s Rock Solid Technologies).
In the book, I dig deeply into each of the five models and companies that have pursued them, both successfully and not.
What about speed to market? Won’t reliance on customer funding slow you down?
Not at all, and it can prevent having to ‘pivot’ too, or help you do so sooner and at less cost. Sadly, there’s the largely naive belief that something called first mover advantage exists. Most of the time, it does not. Excel wasn’t the first spreadsheet. Amazon wasn’t the first online bookseller. The iPod wasn’t the first MP3 player, nor was the iTunes store the first place to buy digital music one track at a time. As my fellow writer and business researcher Jim Collins has noted, “Best beats first, every time.” Speed to market can be important in some situations, but more often, haste makes waste.
What about crowdfunding? Is that what you mean by ‘customer-funded’?
Crowdfunding is all the rage today, but I think there’s a backlash looming, as projects and companies that were crowdfunded fail to deliver on time and on budget. Raising money is actually the easy part of starting a new business, believe it or not. Getting the product right and finding the right customer who simply has to have it is much more difficult. And crowdfunding does little to address these issues.
Can a customer-funded approach work for every kind of business?
No, not every kind. If you want to build a dam and a hydroelectric power plant, you probably can’t sell the power before building the dam and getting the generators up and running. But my research has shown that for a surprising range of businesses – goods and services, B2B and B2C, hi-tech and no-tech, dot-com and bricks-and-mortar – customer-funded approaches can work.
“Crowdfunding is all the rage today, but I think there’s a backlash looming, as projects and companies that were crowdfunded fail to deliver on time and on budget.”
According to your first book, The New Business Road Test, most business plans don’t deliver and are a waste of time and effort. Why is that?
Planning without a product, without a customer, or without firsthand experience is doomed to fail. Visionaries often try to translate their passion into a business plan – one that typically teeters on a pile of untested assumptions, as nearly all business plans do. The New Business Road Test puts in place a body of evidence – about whether the market is or is not attractive; about whether the industry is actually a game in which you’d like to play and in which you stand a chance to sustain competitive advantage over time; and about whether your team is up to the task – that adds credibility to the venture and gives a new level of well-placed confidence to the entrepreneur. My new book takes things a couple of steps further and argues that customer funding makes ‘planning’ largely irrelevant, at least at the outset.
What are the most common mistakes new businesses and start-ups make?
Assuming too much, testing too little, failing to learn from the experience of others, spending precious time and resources going down the cul-de-sacs of suboptimal potential, and most importantly, basing their direction on bald assumptions rather than gathering real-world evidence from the marketplace.
What are the most common mistakes that investors in early stage companies make?
I see two mistakes repeated far too often. First, too many investors think that the job of the entrepreneur – once the check has been written – is to flawlessly execute the plan that was pitched. Dead wrong. The cold, hard facts are that most of the time the initial plan includes some untested assumptions that don’t pan out. The second is the tendency to blame “management” when things go awry. So, rather than viewing the plan as something to be faithfully followed, I’d like to see investors agree that the plan is nothing more than the starting point for a learning journey to be travelled together, entrepreneur and investor, hand-in-hand.
“Too many investors think that the job of the entrepreneur – once the check has been written – is to flawlessly execute the plan that was pitched. Dead wrong.”
As venture capital investor Bruce Golden of Accel Partners has remarked, “As a venture capitalist, nothing is more valuable to me than getting first-hand market feedback from customers about their experience with a new ‘killer’ product. The best and usually shortest path to developing that killer product is by getting customers to pay for it.”
How do you see the future of the start-up process? What will change?
We are in a crucial time for entrepreneurs. There is an opportunity to create best practices to foster innovation and conserve resources while improving the overall chances of success. We have to get smarter, not about innovation itself, but about how we take innovation to market. We need a better way than the conventional path of writing and adhering to business plans created in a vacuum while squandering money, time, and most importantly, entrepreneurial talent in the process. I believe that if every entrepreneur – and every angel – took the time to find a way to apply one of the five customer-funded models in his or her business, we’d have many more smiles on both sides of the deal table. And our economies would benefit from faster creation of new jobs, too.