image of customer funding your business

Customers Instead Of Investors

image of customer funding your businessI run into a fair amount of entrepreneurs who want to raise money from investors for their business. When I ask them a few questions about why they want to raise money, I usually get some combination of the following answers:

1 – We need money to hire a team.

2 – We have a great product but need cash to scale sales efforts.

3 – The market timing is right to accelerate growth. It’s a land grab for market share!

I think these are all legitimate answers. However, and this is a BIG however, the vast majority of the people giving these answers don’t have enough customer interactions to really know if 1 – 3 will take their business to the next level. They think it will. They believe it will. They have no realistic basis to know it will. There are certainly no guarantees, but every customer you work with is one step closer to understanding what you need to do with your business to make it really grow. The ironic thing is the more you do this, the more customer success you will find and the easier it will be to raise money.

Put yourself in a position to have enough customers to not NEED investor money to survive. Raise money if you can crank hard on the 1 – 3 list above.

Like I said, they are legitimate reasons to raise money. Just make sure you are really in a position to execute on those items before you think about investors. It takes a lot of time to raise money. It can be a lot of wasted time if you really aren’t ready. The market generally has a way of funding businesses that have a chance of being big. The more customers you have, the more ready you are. You should be iterating on a business model (NOT a business plan), working with customers early and often, user testing products, a/b testing different looks, and a employing myriad of other forms of testing that are available in mass quantities to today’s entrepreneur.

Shame on you if you aren’t doing all of this maniacally BEFORE you even think about raising money.

If you are, awesome. You’ll survive and figure out if you have a business that can be one of the few to scale rapidly and possibly raise money to really go for it.

Think long and hard about when or if you need outside cash to get to the next step of your business. I’m not considering the contribution that investors make outside of cash. That is for another post. Let me just say that the “right” investors actually bring much MORE than cash to your business. However, finding the right investors, and their cash, is a new layer of difficulty in it’s own right. (Disclosure: we recently found investors that bring WAY more than cash to the table — Highway 12 Ventures and GSAVP)

Anyhow, I digress…

You may also do all of this testing and work with customers only to realize you can build a really nice business that won’t need investor money. In fact, you may find that you have a business that SHOULDN’T raise investor money. That is about 98% of the companies out there. You can still kick butt and have an incredible company! It’s important to remember that many great businesses are not going to be large enough to entice investors to come aboard. As such, I’d say plan to build a business with customers funding your business, not investors. Maybe you’ll break thru and reconsider down the road, but this is the proper default setting in my experience.

It’s a really simple concept; customers fund your business operations thru purchasing your product. Like a lot of things though, the concept is simple but the execution is not. Where are you in the customer acquisition process? Are you funding your business thru customer dollars, your own, investors, or a combination? Let us know what is working for you in the comments.

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About Alex Lawrence

Alex has been a successful entrepreneur for 20+ years. His current venture Lendio ranks #34 on the Inc. 500 list. Alex earned a BS degree at the University of Utah and his MBA at Weber State University, where he is Vice Provost and Director of the Entrepreneurship Program. If you want to talk with Alex about business and entrepreneurship (or other questions), email him (alex AT startupflavor DOT com), or you can find him on Twitter @_AlexLawrence.
  • Awesome post Alex!
    I agree with your points man. You’re right. Every entrepreneur must know how to use their customers in order to know if they will need investors money or not. Most wannabe entrepreneurs are always looking for investors even without knowing if customers will accept their product. Though I first have this kind of mindset at the beginning 🙂
    Some businesses might not need investors money, and to know this, an entrepreneur must learn how to work with customers. Thanks so much for the awesome post! You rock 🙂

    • Alex Lawrence

      Thanks Samuel!

  • Todd Russell

    Alex, this is a great article.
    • I think if you’ve been around enough, you’ve seen the entrepreneur that thinks they have the best business plan in the world, but have little to no sales.
    • On the other hand there are several companies that are started one customer at a time and built upon service and or superior product.
    • There are of course the few that have a great concept, great service and a great plan, but spends all of their capital “building it”, hoping that “they” (The customer) will come. That’s a flawed process.

    I think that the best startups that I have seen have been those with customer’s right out of the gate. And not just customers but LOYAL customers that are spreading the word about their new find.
    That’s my two cents worth. Loved the article. Keep it up!

    • Alex Lawrence

      Todd – some great additional thoughts. Totally agree with you. Thanks for taking the time to share your expertise. I also appreciate the Twitter mention! I look forward to your continued comments; great stuff.

  • jamesosmyth

    Wow, you nailed it! I am guilty as charged with #3.

    As a tech company owner I fear losing “wasted time if we really aren’t ready.” So, instead of pitching to investors for money, I asked to meet and discuss if they thought our company was ready to be funded. We have been granted some wonderful insights.

    Thank you for being a great teacher Alex. Us young entrepreneurs need more mentors like you!

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