A widely accepted notion in entrepreneurship circles is that the way to start and grow a thriving business is to come up with a great “idea”, write a great business plan, raise capital from angels or VCs, flawlessly execute the plan, and (Voila!) get rich! But it hardly ever happens this way. The most cash-efficient entrepreneurs sometimes get their growth funding not from investors, but from their customers. Angel or venture capital can come later, once some customer traction is in hand. By doing it this way, they (and often their early investors) will end up owning more of their companies. Professor Mullins is coming across the pond to teach entrepreneurs and investors alike the five customer-funded business models to put to work to fund their start-ups or grow their companies with some local rock star exemplars as case studies.

1. © John Mullins 2014
What Entrepreneurs and Angels Should Do Before They (You?) Dance
John Mullins
London Business School
1

2. © John Mullins 2014
Let’s Face an Uncomfortable Fact
•Fred Wilson: Union Square Ventures
–“The amount of money that start-ups raise in their Seed and Series A rounds is inversely correlated with success.”
2

3. © John Mullins 2014
Why Might This Be So?
–Talk with your neighbor
•2 minutes
•3 top reasons, please
3

4. © John Mullins 2014
Why Might This Be So?
•My take on it:
–Too much money makes you sloppy, stupid
–Plan A rarely works. But your funder wants you to (flawlessly) implement it anyway!
•Question: Might it be wiser to wait and seek to fund customer traction, instead of a plan?
4

5. © John Mullins 2014
So, What Should Entrepreneurs and Angels Do?
•Here’s what you probably should not do…
5

6. © John Mullins 2014
6

7. © John Mullins 2014
So, Would You Invest in Ali G?
•Fact: the vast majority of fast-growing businesses never raise venture capital (nor write business plans, either)
•Nor should they, at the outset, I argue: why?
•Raising capital too early – whether from angels or VCs – is a dangerous practice, on both sides of the table
7

8. © John Mullins 2014
The Killer Drawbacks of Raising Capital Too Early
•Distraction: takes the entrepreneur’s eye off the ball, now, and later, too
•Higher risk = lower stake for the founder
•And the baggage that comes with it in the shareholders’ agreement
•Is this good news for the investor in such a deal?
8

9. Let’s Consider Some Evidence: US Venture Fund Returns
Returns from inception to 12/31/11.
Source: Josh Lerner analysis of Thomson/Reuters data.
9

10. So, Is There an Alternative? The Customer-Funded Business
10
© John Mullins 2014
Matchmaker Models Service-to-Product Pay-in-Advance Models Models Scarcity-Based Subscription Models Models Your Customer

11. © John Mullins 2014
Is Anything New Here?
•Pay-in-advance models: Consultants, architects, Dell. Nearly all services, too.
•Matchmaker models: eBay, Expedia
•Subscription models: Periodicals, Netflix
•Scarcity models: Zara
•Service-to-product models: Microsoft
•But let’s look at some savvy 21st century entrepreneurs putting them to use
11

12. Vinay Gupta 2006: A Pay-in-Advance Model
© John Mullins 2014
12

13. Brian Chesky & Joe Gebbia 2007: A Matchmaker Model
© John Mullins 2014
13

14. Krishnan Ganesh 2005: A Subscription Model
14
© John Mullins 2014

15. Krishnan Ganesh 2005: A Subscription Model
© John Mullins 2014

16. Jacques-Antoine Granjon 2001: A Scarcity Model
© John Mullins 2014
16

17. Balder Olrik, Claus Moseholm 2003: A Service-to-Product Model
© John Mullins 2014
17

18. © John Mullins 2014
These Examples Share Three Attributes in Common
•Negative working capital – love thy float!
•They required essentially no external capital to get started
•When they did raise capital to grow once the concept was proven, there was an eager queue of angels or VCs lined up at their doors
18

19. Not Just for Pioneers
19
© John Mullins 2014

20. © John Mullins 2014
So, What About You?
•Which one of the five models might be put to work in your new business?
–Pay-in-advance models
–Matchmaker models
–Subscription models
–Scarcity models
–Service-to-product models
Talk with your neighbor
•2 minutes
20

21. So, Which Did You Choose?
21
© John Mullins 2014 Matchmaker
Models
Service-to-Product Pay-in-Advance
Models Models
Scarcity-Based Subscription
Models Models
Your
Customer

22. © John Mullins 2014
OK, “So What?” As an Entrepreneur, What Should You Do?
•First, what NOT to do
•Prepare
–Pages of prose
–Reams of spreadsheets
–All in support of the perfect Plan A (that probably won’t get you where you’d like to go!)
22

23. © John Mullins 2014
OK, “So What?” As an Entrepreneur, What Should You Do?
•Mark Suster, Upfront Ventures
–“I say ring the freaking cash register. I have said so for years!”
23

24. © John Mullins 2014
So, Is Venture Capital – from Angels or VCs – Bad for You?
•Not necessarily. It’s the timing that concerns me.
•And it concerns Mark Suster and Fred Wilson, too!
•If you’ve got a venture that’s firing on all cylinders, perhaps yours, that’s when to add fuel!
24

25. © John Mullins 2014
But Can You Get Funded by a Good Angel or VC?
•Consider the rejection rates
–YCombinator 97.1%
–Angel List 98.9%
–Andreessen Horowitz 99.3%
•Is customer-funding a better way to go?
25

26. © John Mullins 2014
A Final Observation on Business Plans
“We believe that…
26

27. For the “When-to”, the “How-to” and the Pitfalls to Watch out for…
David Rose, NY Angels
“The Customer-Funded Business should be mandatory reading for every entrepreneur before even thinking about seeking angel or venture capital.”
27
© John Mullins 2014

28. © John Mullins 2014
In a Nutshell…
“The customer is not just king.
He can be your VC, too!”
Bernie Auyang
Angel Investor
Shanghai
28

29. © John Mullins 2014
Questions?
jmullins@london.edu
www.TheCustomerFundedBusiness.com
@John_W_Mullins
29