Customer-Funded Startups

Being customer-funded first is always best for tech startups.


Ian H Smith

The current economic climate and failure of Silicon Valley Bank (SVB) reinforces a number of key things facing tech startups. Investor confidence moves from one extreme to another. Today, investors have become cautious again and raising money is challenging for early-stage startups.

I work with tech startups who find venture capital a non-starter. The best funding for the majority of tech founders is customer funding. And now, post-SVB failure, we all know that tech 'Unicorns' are mythical beasts.

Customer-funded startups are the new post-SVB failure reality. Early adopter customers - even large, conservative organisations - will invest in a product or service well ahead of completeness - if it is communicated as a truly compelling Value Proposition. This also requires founders of the tech startup to achieve sufficient receptivity, rapport and trust with the decision-making buyer.

As I found with, positioning their technology as a Low-Code Integration Platform for Salesforce, allowed me to monetise the UK National Health Service (NHS) as an early adopter customer. This is an example of a very small tech startup with a handful of employees beating established software publishers in a large, inherently conservative customer organisation.

So how? And why?

The win at the NHS was really based on presenting a clearly differentiated, yet low-cost quick-win outcome, and then growing from within, as confidence was built across a broad range of stakeholders.

Together, we solved a big problem that could have been solved by many other, larger software publishers, but the differentiators were:

  1. Clear, proven Return On Investment (ROI) Model: Mutuasl Value Discovery.
  2. 10x+ cost advantage v. integration software competition (MuleSoft).
  3. Great user experience - run a third-party app workflow directly inside a Salesforce Record.
  4. No increase in technology risk - data hosted in the trusted, world-class Salesforce Platform.

Another misconception is the need to fund a digital product or service to completion before trying to identify, engage and monetise early adopter customers. This may be true for regulated markets, such as healthcare and life sciences, but for solving business problems with cloud-based software applications, the earlier customers are engaged, the better.

Method: Design Thinking in Sales

To identify, engage and monetise early adopter customers - ahead of completeness of product or service, I have developed a sales method to meet this challenge: Design Thinking In Sales. As this blog post on my sales method describes:

"With the Value Proposition created through applying the three Design Principles, the buyer can now safely and clearly engage with the seller through the five steps of Design Thinking in Sales, starting with step one: Empathize."

Empathy is key to engaging with prospective early adopter customers. Specifically, this means engaging with early adopter customers through Mutual Value Discovery, where receptivity, rapport and trust is generated between buyer and seller. With trust established, the truth may be revealed in the Mutual Value Discovery process - quantifying and qualifying win-win value outcomes.

Mutual Value Discovery allows a tech startup to determine the right Pricing Model for its new product or service, applying Value Engineering as a structured approach to determining an Economic Basis of Decision and Emotional Basis of Decision. This allows for a Future State to be compared to the Current State, with/without the investment in the new Value Proposition.

To counter deal slippage, this also enables the buyer to validate the Cost of Delay or Cost of Doing Nothing. It enables even the most conservative, risk-averse buyer to become convinced to buy - and in a timely way.

All of this focuses on a crucial thing when selling a product or service well ahead of completeness: trust. By applying Design Thinking In Sales, buyer trust is a consequence of achieving receptivity, and rapport with the seller.

This means that going through the five steps of Stanford Design Thinking (Empathize, Define, Ideate, Prototype and Test) creates an environment that achieves a strong ROI Model for timely monetisation outcomes from customer-funded development.

Checklist: Non-Dilutive Funding

Here is my Checklist: Non-Dilutive Funding. These are questions I have gathered from the many founders and investors I have worked with over the past forty years. Along with Design Thinking In Sales, this Checklist is a foundation for later-stage funding - if needed beyond early adopter sales.

If pursued at a later stage, external funding can often be achieved with no dilution of equity or control. For example, Non-Dilutive Funding, in the form of Debt Financing, becomes viable if early adopter customers are monetised at earlier stages.

Strategic Intent

Are you building an investment vehicle or lifestyle company?

What is your exit strategy?

Proof of Claims

Do you have one or more early adopter customers?

Can your early adopter customer(s) validate a Return On Investment (ROI) Model for your solution?

Problem Being Solved

What problem are you solving?

Why are you best placed to solve this problem?

Ability to Execute

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

Tangible or Intangible Assets

What are your tangible or intangible assets and how do they offset risk for investors?

Sustainable Competitive Advantage

How are you going to effectively compete with established orgnisations and other challengers?

Return on Investment

What is the clear path, timeline and the return for the investors?

Do you have any early adopters, and if so, who are they?

Can you survive on monetising early adopter customers?

When does the company become profitable?

What size will the cash burnrate be until profitability?

What are the quantifiable grants available and when?

Culture and Values

Who are the co-founders of the business and why?

How many hours per week will the co-founders put in to the business?

How will the company conserve cash and get all of its associates to think like owners?

What compensation packages does the company intend to offer co-founders?

Are the incentives of key executives, co-founders and investors aligned?

What essential elements define the company’s culture?

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?

Are you investing in sales coaching?

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