I’ve worked with over 600 different technologies and more than 300 entrepreneurs. Almost all of them who are trying to breathe life into a new business think they have a money problem.
The funny thing is that as I look back on my own ventures and realize that, if anything, my problems stemmed from too much money rather than too little.
Too much money is not always a good thing
My biggest mistake has been to see some initial success with a venture and then go full bore – scaling up far too early. Had I had less money, and more street-smarts, I would’ve held back.
So often, that initial success turns into a nightmare if you scale up too fast. In my first startup, at age 15, the product was defective and was returned by all of my customers. In several businesses since then, sales went very well and I hired 10, 20, as many as 30 salespeople, only to have all the problems of fulfillment and delivery that were not anticipated make the whole thing blow up in my face. Laying off 30 people is no fun. I don’t plan to make that mistake more than once.
I also remember the time that I raised $14 million in venture capital from some very prestigious firms. One of the name partners, a man who is extremely famous, even put some of his private money in. And then they pressured us to spend the money aggressively. I’m not kidding. As twisted as it sounds, we had to have a “burn rate” that was high enough to justify that fat bank account.
In reality, though, most people don’t relate to having too much money. So let me tell you a few ways you can raise enough money without getting investors, borrowing on your credit cards or giving an IOU to your mom.
Prepayment from customers strategy
My favorite form of finance is getting prepayment from customers.
Here’s why prepayment is so glorious. First, as entrepreneurs, we’re always dreaming about demand. We need the real world to rudely interrupt our dreams and give us a cold-water shock once in awhile. Nothing fits the bill like going and asking for money from your customers. If they won’t give it to you, then you don’t have the demand you thought you did.
In one of my businesses, we funded the entire venture through prepayment. These were loans we paid back by performing a service. Then the customers prepay for the next month, or the next batch, of product.
There’s nothing better than getting financing from your customers. But a lot of people have trouble asking customers to prepay. Let me give you a little script that has helped.
Here’s what I say to a new customer: “Someone has to owe someone else money. If I work for you for a month and then invoice you, I will be playing the banker to you. And I will have to finance you for about 45 days. But I am a small startup company and you are a larger, more established firm. That’s why I ask my customers like you not to expect us to play the banker. And that’s why I’m asking that you pay me one month in advance.”
Makes sense, right? People think this is gutsy to say to a new customer. But it’s smart. It lets you start your business without a single drop of outside financing.
In fact, you have to be careful because this can let you get too much money too quickly, with all the problems that can bring.
By getting prepayment, you are turning customers into a finance source. You avoid personal guarantees. You avoid credit card debt. And you avoid having arguments with your partners. Customers really don’t care all that much about how you run your business. They just want you to deliver what you promise. How you deliver it, and how you run your company, is of no concern to them.
Customers make the ideal financing source and should be on the top of your list for your startup.
Key points:
- Avoid counting on money from investors because it is very expensive money and may actually hurt your chances of startup success
- Try to get customers to prepay. That way, you’ll quickly find out if you have a product or service that people really want. You won’t delude yourself if you don’t.
- Use prepayment and customer financing to avoid personal guarantees and investor debt.
