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© John Mullins 2014 
What Entrepreneurs and Angels Should Do Before They (You?) Dance 
John Mullins 
London Business School 
1
© 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
© John Mullins 2014 
Why Might This Be So? 
–Talk with your neighbor 
•2 minutes 
•3 top reasons, please 
3
© 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
© John Mullins 2014 
So, What Should Entrepreneurs and Angels Do? 
•Here’s what you probably should not do… 
5
© John Mullins 2014 
6
© 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
© 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
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
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
© 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
Vinay Gupta 2006: A Pay-in-Advance Model 
© John Mullins 2014 
12
Brian Chesky & Joe Gebbia 2007: A Matchmaker Model 
© John Mullins 2014 
13
Krishnan Ganesh 2005: A Subscription Model 
14 
© John Mullins 2014
Krishnan Ganesh 2005: A Subscription Model 
© John Mullins 2014
Jacques-Antoine Granjon 2001: A Scarcity Model 
© John Mullins 2014 
16
Balder Olrik, Claus Moseholm 2003: A Service-to-Product Model 
© John Mullins 2014 
17
© 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
Not Just for Pioneers 
19 
© John Mullins 2014
© 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
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
© 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
© 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
© 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
© 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
© John Mullins 2014 
A Final Observation on Business Plans 
“We believe that… 
26
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
© John Mullins 2014 
In a Nutshell… 
“The customer is not just king. 
He can be your VC, too!” 
Bernie Auyang 
Angel Investor 
Shanghai 
28
© John Mullins 2014 
Questions? 
jmullins@london.edu 
www.TheCustomerFundedBusiness.com 
@John_W_Mullins 
29

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Let's Talk About Sales: Understanding the Five Customer-Funded Business Models

  • 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
  • 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