Use Customer Cash To Finance Your Start-Up

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John Mullins
July-August 2013
By D.Ravi Varma (B605)

. Business plan developement and many more.. • His teaching subjects include Financing the entrepreneurial business.2 of 15 About Author: John Mullins. • Getting to plan-B was his major achievement. • He is a Standford MBA and Ph. • At present he is the faculty at London Business School.d. Hifives.What do You mean by Start-up? 3 of 15 • The money that is required to start a new .

. • By 2012 Airbnb had raised $120 million in venture funding and was valued at more than $1 billion. • In 2007 two design school graduates dusted off some air mattresses and rented out space in their San Francisco apartment to conference attendees who couldn’t find hotel rooms.• Airbnb is one of the most celebrated start-ups of the past decade.000. netting Coming to the world of Entrepreneurship 4 of 15 $1. • The business model is structured so that advance customer cash helps finance growth.

testing.(Negative Working capital). .5 of 15 • It’s a strategy more new businesses should consider: receiving cash from customers before having to lay out money for the product or service to be sold. refining. • One of the biggest benefits of doing so is that it allows company founders to focus on creating. and proving their business models instead of on courting investors.

Discover a Better Form of Financing • Many start-ups spend too much time looking for financing— and invest too much money in prototypes or inventory. are tight. as is the case in many markets right now. .6 of 15 • Customer-funding model is especially helpful when traditional forms of financing. such as bank loans. • Some entrepreneurs avoid those traps by adopting business models that give them advance access to customers’ cash as a means of funding early growth.

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8 of 15 The Matchmaker Model • Some companies’ entire business models consist of connecting buyers and sellers. • Example : Ebay and Expedia. . • These companies do not have inventories and the cost of goods sold is extremely low.

The Deposit Model: 9 of 15 • In deposit model the company initially accepts deposits from public and render the services as and when recquired by the customer. • After 1 year it had signed up 3000 agents in 290 cities. • A classic example is the travel start up Flight Raja (Now Via) which used this model . • Initial deposit of $5000 from travel agents. • By 2012 annual revenue crossed $500 million. • Within 2 months it had signed up 180 agents booking 200 tickets a day. .

the business is high capital –efficient and it enjoys smoother revenue growths than most start up’s do.10 of 15 The Subscription Model: • Customer pay a predictable monthly fee in advance. . • In 2005 Krishna Ganesh hired 3 teachers in Bangalore. • Newspapers and cable networks have used subsciption models for many years.

• This strategy relies on offering a customer the process so they no longer have to do the process manually and have them provide a contract that finances your developing the tech or process yourself.11 of 15 The Standardize And Resell Model • Start-ups leveraging this model develop technology or systems that do what people have been doing manually in labor intensive businesses . .

. • This tactic takes advantage of the situation that retailers normally have credit with their vendors.12 of 15 The Scarcity Model • Companies leveraging this model use scarcity to motivate customers to pay and buy early and quickly.

• Customer funded models don’t suit every venture .13 of 15 Conclusion • Each of these models allowed company founders to launch with little or no external financing and to use the time not spent seeking potential investors to fine tune their business. . Capital intensive projects that recquire manufacturing plants other infrastructure must almost always relay on traditional financing.

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