Return to site

Customer-Funded Startups

How customers can be the main source of investment.


Ian H Smith

New tech ventures face many hurdles, not least access to capital. Regardless of whether you are a startup or a spinout tech venture, if you are trying to convert know-how into a monetised digital solution, to solve a compelling problem, then there is a better way: be customer-funded alongside pursuit of raising angel, venture or industrial capital.

The Power of Networking 

I have built a global network of like-minded Design Thinkers. Among this collective are mentors, entrepreneurs and enterprises, where new ideas are actively encouraged and embraced. This provides startups with a way to rapidly validate new tech products and services.

The notion of The Lean Startup has been much discussed, since Eric Ries wrote the book in 2011. I think that what many digital entrepreneurs and tech startups are hindered by is making the assumption about needing to have at least a Minimum Viable Product (MVP) in a complete state, before engaging with would-be, target Early Adopter Customers. This blog post challenges this assumption!

The best investors in a startup or spinout venture are customers. They rarely take equity in your firm, they don't sit on your Board telling you what to do - but they do have the ultimate vote in whether your Value Proposition truly meets their needs, or not - since they are voting with their money (and sometimes their careers) in becoming paying Early Adopter Customers.

Firstly, lets look at the barriers - or perceived barriers - to enabling a startup or spinout tech venture to be truly customer-funded:

  • Cost and time to create a Minimum Viable Product (MVP).
  • Willingness of customers to invest in products ahead of completeness.
  • Placing trust in new, unknown brands and little understood products.

As explained below, new digital innovations, created as Software-as-a-Service (SaaS) apps, can be designed and developed through making use of prebuilt business logic in the cloud. This is often overlooked, and results in many startup tech ventures reinventing the wheel, by unnecessarily building expensive SaaS apps ground-up with complex syntax coding techniques.

Identifying the Early Adopter Customer as investor is key. This is expanded upon further below, focusing on what a true Early Adopter Customer looks like, and how to engage with them.

At the end of this blog post, go through the Startup Checklist to see how you respond to these tough questions that I have gathered over the years from venture capital, angel and industry investors. Let me know what you think.

Don't Reinvent, Reuse

Tech innovations come in many forms, but this blog post is oriented towards software: specifically, technology that is typically packaged as a Software-as-a-Service (SaaS) outcome, and delivered on a public cloud ecosystem - variously described as an Infrastructure-as-a-Service (IaaS) or Platform-as-a-Service (PaaS). Leading IaaS and PaaS players are: Amazon Web Services; Google Cloud Platform; IBM Bluemix; Microsoft Cloud (Azure); and Salesforce Heroku.

When you look at digital innovation today, the tech platforms are becoming increasingly similar in underlying architecture. Yet many startups burn precious time and money 'reinventing wheels': often recreating tech platform infrastructure that already exists, rather than concentrating on what makes them truly distinct. What's needed here is the right choice - and sometimes a blend of Reusable Modules and a Low-Code Platform.

For more about applying a Low-Code Platform, read my blog post: Platform Rethinking. Later, I will explore the significant rise of fintech startups in London, and the power of reusable modules with innovative Blockchain platforms.

Identifying Early Adopter Customers

When startup or spinout tech ventures consider engaging Early Adopter Customers, they often believe that selling ahead of completeness of product or service is not possible. They are wrong: Early Adopter Customers are inherently risk-takers, willing to engage with new value propositions. This is why understanding and identifying the 'psychographic profile' of an Early Adopter Customer (business or consumer) is key to targeting and winning business for a new venture.

The Early Adopter Customer is the 'responsive' prospective customer.

Startup or spinout tech ventures need users or other participating stakeholders in any digital innovation process to be truly responsive. So, from a psychographic profile perspective, what characterises the ideal early adopter, as digital innovator?

At a human level this can be measured by what psychologists call a 'Need For Cognition (NFC)': a personality variable reflecting the extent to which individuals are inclined towards effortful cognitive activities.

Stakeholders who are inclined towards 'effortful cognitive activities' means people who like problem-solving, who embrace challenges - and who ask, and respond to insightful questions. Need For Cognition (NFC) is also related to openness and conscientiousness (Sadowski & Cogburn, 1997). This reflects both openness - a curiosity and tolerance of new ideas - and conscientiousness - a willingness to engage in effortful thought (Verplanken, Hazenberg & Palenewen, 1992).

So, how can you identify Early Adopter Customers, using everyday social media and email marketing tools? The answer is to provoke responses from target business or consumer decision-makers who are inherently inclined towards 'effortful cognitive activities': people who ask and respond to insightful questions, as defined above.

In practice, Early Adopter Customers are those empowered, motivated people who recognise the problem you are solving, and who, beyond agreeing with your approach, are motivated to make a timely move towards taking up your 'call to action'. This is where Early Adopter Customers can engage at the earliest stages of a startup - not waiting for the 'Beta' test. Making Early Adopter Customers part of the design and development process also means adopting the best practices related to Design Thinking. Ultimately, it means remembering this:

You are not your customer!

By engaging Early Adopter Customers from day one (or closest to day one) you are able to incentivise these businesses or consumers to become paying customers - contributors to the funding of design and development phases, where no external investors exist. Incentivising Early Adopter Customers is key to enabling the Zero Money Startup. It is also the ultimate validation of your ideas - and the creation of what is essential versus 'nice to have' in your Minimum Viable Product (MVP).

Building Receptivity, Rapport and Trust

Startup and spinout tech ventures should operate with two rules from day one:

#1. You are not your customer. However passionate you are about your product or service, always remember that customers are the only people who can validate your Value Proposition.

#2. Customers are the best investors. Whilst financial investors (VCs, et al) may be an inevitable part of the mix in your venture, large medium or small customers are always the best investors.

So, what follows these rules is a big question:

How do you win Early Adopter Customers when you don’t have your digital product or service fully built - or maybe, not even available in an Alpha or Beta state?

The answer to this question is: apply Design Thinking. Typically, the would-be Early Adopter Customer should be invited into a set of Mutual Value Discovery meetings, and all stakeholders work through five iterative steps: Empathize; Define; Ideate; Prototype; and, Test. And where you can, add/use a Low-Code Platform.

What follows in these Mutual Value Discovery sessions is clarity around what the Value Proposition Design is - and should be - as understood by the would-be Early Adopter Customer. This is where the Economic Basis of Decision is quantified and the Emotional Basis of Decision is qualified. What follows is the answer to a tough question:

What bad things happen, if the Early Adopter Customer does not buy the Value Proposition?

This question relates to what can be quantified as the Cost of Delay or the Cost of Doing Nothing, in relation to a 'go/no-go' buying decision. Underpinning all of this is the Return on Investment (ROI) Model that support the Pricing Model for the digital product or service being considered here.

Your Startup Checklist

Here is the Startup Checklist: some very simple but tough questions that venture capital, angel or industry investors have asked me or my clients over the years. This applies with, or without non-customer funding for any startup or spinout tech venture.

Elevator Pitch
Can you describe your opportunity in one sentence – or, at most, in one paragraph?

Ability to Execute
Is your ability to execute feasible for an unknown small start-up?

Intellectual Property Assets
What are your sustainable intellectual property (IP) assets in the face of hyper-competition that characterises all technology markets? No patent or solid copyright = no sustainable IP.

Real Customers
Do you have one or more real pre-committed or actual customers? No customer(s) = no investment.

Sustainable Competitive Advantage
How are you going to effectively compete with incumbents and new entrants?
What is the source and long-term sustainability of the company’s differentiation?

Meaningful Value Proposition
What is the serious problem your company is trying to solve?
What evidence is there to suggest that there is a compelling need for your value proposition?
What value would customers attribute to this problem?
What bad things happen if the customer delays or declines a buying decision?
Why is no one else offering this solution?
Who are the key competitors – current and future?

Return on Investment
What is the clear path, timeline and the return for the (customer as) investor?
When does the company become profitable?
What size will the burnrate be until profitability?
How long is the buying and selling cycle?

Culture and Values
How many hours per week do the founders put in to the business?
How will the company conserve cash and get all of its employees to think like owners?
What compensation packages does the company intend to offer employees?
Are the incentives of key executives, founders and (customers as) investors aligned?
What essential elements define the company’s culture?
How is the company vision clearly communicated to and understood by all employees?
Are the right employees located in the same place as each other?
What percentage of the investment goes towards executive team salaries?

Risk Mitigation
What can go wrong and how will you survive it?
What alternatives are available to the company if a major risk materialises?
Which of these risks could be fatal to the business?
What alliances could help the company mitigate risks?

Sales and Marketing
Do you have an experienced sales and marketing player in your leadership team?
How do you compensate the sales organisation?

All Posts

Almost done…

We just sent you an email. Please click the link in the email to confirm your subscription!