Why start-ups should avoid investors in the early phase?

Associate Professor of Management Practice, London Business School, John Mullins shared his ideas on customer funded business at Aalto Ventures Program Thought Leaders’ Talk in Otaniemi StartUp Sauna on January 26th 2015.

Mullins’ presentation title was asking “What entrepreneurs and angles should do before they dance?” He started the lecture with requesting the audience to have a short discussion on  why the amount of money a start-up raised from investors often turns out to be inversely proportional to the success of the startup.

Audience and his own answers to the question included the following:

  • Time spent with the investors is a distraction the the actual business development.
  • Money makes you lazy.
  • You cannot know what the customers want without talking to them.
  • Investors want to see the plan being implemented – even though that there would be urgent need to modify the original plan.

So a start-up’s initial target should be to find customers to fund the business, not to run after  investor money. Mullis presented five types of customer funded business models (illustrations here are my own associations):

Matchmaker model

Matchmaker

Examples on matchmakers are Amazon and eBay who take their slice of each transaction but do not maintain own storage that would require investments.

Pay in advance model

Pay in advance

Customers fund the business by paying before the services or the goods are delivered to them.

Subscription model

Subscription

Loyal subscribers make the entrepreneurs’ life easier By considerably reducing the need for sales efforts. For example Netflix relies on a subscription model.

Scarcity based model

Scarcity

Scarcity based business model may work in fashion industry – but here the offering needs to be highly attractive.

Service to product model

From service to product

Microsoft started with a service based business model and developed that to product sales.

Mullins’ concluding advice at the end of the lecture was not to avoid talking to investors but to talk to them at the right time. Start-up companies’ first priority should be to get paying customers. As the business is up and running, it’s time to talk to investors to grow. In this phase the customer funded business will also wake much more interest among the investors.

John Mullins’ lecture and other Aalto Ventures Program lectures can be viewed in Youtube at Aalto Ventures channel.