When I was an angel investor in 2001, I listened to a lot of small-business owners' pitches. My favorite was the entrepreneur who said, “All I need is $3 million so I can really make this business work.” That seemed outrageous for someone who had yet to get their first paying customer.
Contrary to popular wisdom, most owners may overestimate the capital investment they need to grow their business. Investing a lot of money upfront may be a traditional model, but it can also be risky. Taking money from your savings account or family and friends can be very sensitive. Applying for a loan can be time-consuming and take the focus away from the actual business.
A safer alternative may be to grow your company without any outside funding, using one of these common customer-funded business models.
Get Customers First
Create a business email account and put up an inexpensive website. Tell everyone through social media that you're in business. You can list the business offering on Fiverr, Elance, Indiegogo and TaskRabbit for free to promote your company. Don’t build anything or hire anyone until you have a paying customer.
This model is effective for: all service businesses.
Pay in Advance
When customers order the product, have them pay upfront. This can be a perfect way not to “go upside down” on cash flow. Use their upfront money to pay the cost of the product or delivery of the service. A good example of this is a high-end furniture business that requires 50 to 100 percent advance payment at time of order.
This model is effective for: product distribution, service professionals and custom products.
Get Regular Subscribers
These customers pay for your products on an ongoing monthly subscription basis. This model typically has a low cost of service delivery and can become a reliable source of income for your company. A good example of this is the shaving website, Harry’s, that delivers razor blades monthly.
The model is effective for: consumable products, information marketing or maintenance services.
Do Flash Sales
These products and services have, by design, a limited availability. This can allow you to get a large amount of prepaid orders at one time so your product can be produced in advance at a lower cost.
This model is effective for: specialty, collectible and luxury items.
Create a Marketplace
This bring buyers and sellers together to make a commission when the transaction happens. No product is ever inventoried or sold by the actual company. Good examples of this are VRBO, Airbnb and Uber.
This model is effective for: Web marketplaces for any goods or services.
In the end, the secret sauce for all sustainable businesses may just be paying customers that help you make a profit. Don’t forget to include them in your recipe for success.
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