My first company, Distil Interactive, was a venture backed company. This time we are trying a different model — being a customer backed company. A customer backed company raises capital directly from customers through sales and services. I am finding this approach ultimately better than the venture capital route. Here’s why:
1. Customers have more money It’s true. Every successful business has brought in more cash from their customers than their investors. A typical VC pitch goes something like this: “Invest X millions of dollars and 18 months later customers will give us 10X millions of dollars in sales.” Cut out the middle man and go directly for the the big bucks.
2. Save Time Pitching your company to investors takes time. You need to learn how to sell your idea to investors — the pitch — which can only be perfected by actually pitching. It can take hundreds of meetings and 6-12 months before finding an investor that will say yes. And here’s the rub, what worked on selling an investor will not work on gaining customers. You will need a different pitch for your customers, which can only be perfected by talking to customers. It can take another 6-12 months to learn what works repeatably with customers. Save time and learn how to sell to customers before selling to investors.
3. Customer Focused Managing a venture backed business brings lots of distractions. There are board meetings and term sheets. VCs look for growth, so there will probably be additional employees and infrastructure. All of this takes time and focus away from finding and satisfying customers. Being customer backed allows you to focus everything on your customers without distraction.
4. Managed Growth One pitfall of being venture backed is growing too quickly. The market opportunity is worth XXX dollars, and to execute on that opportunity we need YY resources. These resources may even be added before you have your first customer. This is a big risk to your company as your burn rate is MUCH larger than your customer base will support. Being customer backed means that you take on additional resources only as your customers demand them or you have achieved the revenue to support them.
Those are my thoughts why a customer backed company is preferred to a venture backed company. In a future post I’ll share some ways that we are building a customer backed company.
How do you see the benefits of customer backed versus venture backed? Any specific questions about how to build s customer backed company? Put them in the comments and I’ll try to answer them in a future post.