Little known way to finance a startup

customer

Virtually every founder I meet is looking for capital, mainly from VCs, with one or two exceptions. And if it isn’t VCs, it’s friends and family, angels, or strategic investors. But there’s one little talked about way to finance a company that a couple of my mentees have followed successfully: customer revenue.

Scott Kirsner’s Boston Globe article A pitch for ‘reality-based’ startups oddball title isn’t very helpful for founders seeking capital, but the article itself is well worth reading for zero stage founders. Scott, like all good journalists, is an excellent storyteller, and in this article he tells the story of several companies in the Boston area that are backed by customer revenue, not venture capital.

In the world of startups, we’re often more transfixed by stats related to funding raised — or the fantasy valuation that that funding implies — than revenue or profitability. (And yes, I include myself in that “we.”)

But there is a class of fast-growing startups in Boston that eschews VC dollars in favor of actual revenue from actual customers. You might call them revenue-driven, rather than venture-backed.

Christopher Bergh, CEO of a Cambridge startup called DataKitchen, has an interesting thesis he shared with Scott Kirsner:

“Venture-backed startups have to sell a story,” Bergh explains. “In many cases, the story is more bluster and bravado than facts on the ground.” Investors want to hear about tapping into billion-dollar markets and leveraging cutting-edge technologies. “If the story that an entrepreneur sold to investors two years ago is correct, but develops a little slower than promised, pressure and unpleasantness ensue. These companies are story-driven, not reality-based.”

I get a laugh out of this as virtually every expert in investor presentations tells founders that in order to successfully raise capital they must tell a story! And what I tell founders is that they need to “capture the imaginations” of investors.

Scott tells the stories of several Boston-area companies that have successfully bootstrapped themselves. Todd Barland, CEO of BuySellAds has two great comments:

“We spend our money wisely and just make sure that we spend less than we make each month,”

and

“I love the constraints — they force us to be creative, ruthlessly prioritize, and focus on sustainability and growth at the same time,” rather than growth at any cost.

I particularly like the second quote, as it jibes with the saying that “necessity is the mother of invention.” I’ve found that companies with too little capital often succeed more often that those with too much. I had one of those, we raised $8 million back in the 90’s when that was real money, after one half-hour meeting with two of our previous investors. The company almost sank. In fact we even considered giving what was left of our capital back to the VCs, before it pivoted to a totally different business model and customer set and eventually went public. Having not quite enough capital truly focuses the mind, while having too much can lead to lazy thinking and sloppy execution.

So founders, before you follow the very well worn path to venture capital, which often goes nowhere, try the little trod path of financing your company from customer revenue.

And ironically if you succeed in doing that the VCs may be calling you. As Bergh told Scott Kirsner, he often gets cold calls from junior employees at venture capital firms, asking him if the company is in need of capital. “I love getting them,” he says — likening it to the nerd getting attention from the “cool kids.”

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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