The two-horse race most startups don’t even realise they’re running

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By Francis Moran

It is an article of faith that startups need funding.

For most, that means chasing external investors, whether they be friends and fools, angels or venture capitalists. Any CEO who has gone this route knows it can be an almost all-consuming task that gobbles up an inordinate share of that most restricted of resources, time. The biggest risk, besides failing to secure the necessary dollars, is that focus on the most critical objective of a new startup, developing and bringing to market an actual product, can take a back seat whilst the funding search is so fully engaged.

Too many startups fail to realise that there could well be another horse in the race to secure the money necessary to fund a new venture, a horse that is often running neck and neck with potential investors and that could, with a little judicious jockeying, beat the field to be the first past the funding post.

That horse is called your first customers and I am always amazed that so little attention is paid to this option.

For some companies — our early clients that were developing new semiconductors or building new network boxes are obvious examples — the product-development cycle is simply far too protracted to expect a customer that won’t be able to take delivery of finished goods for two or three years or more to pony up much money at the risk-heavy front end of the cycle. But for many others, especially those with shorter development cycles, the benefits are simply far too compelling not to give this option very serious consideration.

As a marketer, the most obvious benefit I see is that getting early customers to help underwrite your product-development processĀ compelsĀ a necessarily close fit between that process and real-world market needs. From the outset, you know that you are building something for which someone is willing to pay. Throughout the process, you get feedback at each product iteration from customers with an invested interest in your getting it right. So long as you can avoid the very real danger of building something only one customer wants to buy, you will exit this process with a market-ready product and established customers you can use as critical testimonials and use-cases in the marketing of it.

For entrepreneurs keen to hold onto as much of the value of their startup as possible, getting customers to finance your company has the sweetest of all benefits — it’s non-dilutive.

Are you furiously betting on just one horse to win the funding race for you or have you at least hedged your position by placing a healthy wager on this promising alternative?

Image: Jeffrey Bing

/// COMMENTS

2 Comments »
  • Sherry Draisey

    January 05, 2012 2:44 pm

    we have very prestigeous customers, that we try hard to support (mostly export customers). And we have the only commercial product in the world available to them. But it isn’t leading us to either big sales, or investors.

    My hope is that our customers develop a killer application, but I’m pretty sure we’ll never be able to protect what we’ve fostered. We’re more of a volunteer effort to support brain research.

  • Andrew Moizer

    January 06, 2012 2:49 pm

    Good points (as usual). The way I look at it is that if you’re after investment then you need to manage two products: one your “real” company with it’s product and/or service plus the “investment vehicle” that’s looking for funding. They’re linked but often a lot more distinct than is realized. Going after customer (usually more incremental) funding (aka sales) allows a more complete focus on the “real” company.

    As I recall from some questionnaire, the one necessary and complete thing for a successful company is a customer.

    cheers,
    Andrew

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