

Bypassing the VC: Funding Your Business with Deferred Revenue - mediaman
http://markenomics.com/2009/05/entrepreneurship-deferred-revenue/

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pie
This may seem like an obvious point, but encouraging prepayment is often
overlooked by typical struggling startups when designing billing options. It's
definitely something to consider if you haven't already.

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jakewolf
I used this for financing a new landscaping company. 15% of my customers
prepaid their maintenance fees for the year at a 10% discount. Purchased
tools, equipment and paid lease downpayment on a truck with the money and
still had some leftover for hiring two helpers.

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paulgb
Isn't this just taking the risk from the venture capitalist (who is in the
business of taking risks) and giving it to the customer (who isn't)?

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edw519
Who better to bet on you than your customers?

This is _exactly_ the method taught to me by my mentor, who affectionately
referred to our first customer in any business as our "sugar daddy".

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paulgb
Not saying they aren't, just that the article glosses over the fact that the
customers are taking on the risk that a VC normally would and not getting the
reward. If the customer needs your product enough that they are willing to
take that risk, it doesn't seem like such a bad idea.

(I worked for a company that got started this way. Although they went on to
take VC money, they were in a good position by the time they needed it.)

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mediaman
Part of it is because of the cost of capital. It's very high for startups and
much lower for others, particularly busines customers, although the concept
also applies to consumers who buy things like magazines. Clever startups can
capitalize on this difference in capital cost by discounting the price enough
to incentivize the customer to take the prepay, but not so much that it's not
worth the boost in liquidity.

But yes, it means the customer takes the risk and doesn't get paid for it the
same way a VC would, which in my book is a good thing for the startup.

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brc
The important word here is : liability.

Once you take the customers money up front you better deliver them the
service. If you take 12 months worth of money, you need to be around for 12
months at least. If you stop delivering the service 6 months in, the customer
may pursue the unused money.

This is an interesting specific example but the broader message is to
concentrate on your cashflow conversion. Bad businesses are ones where you
hold a lot of inventory for a long time, either paid up front or using
borrowed money, and then try to sell at a profit. Good businesses are ones
where you take the cash, then deliver the product. Dell was so successful
principally because they built on demand, using the customers money to
purchase the parts, and needed little working capital.

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alain94040
This works great for B2B consulting or custom products. That's actually how my
previous startup managed to survive for more than a year without raising VC
funding, and we were able to develop a hardware product on our spare time (and
dime).

It won't work for consumer/web applications, unless you have some Pro version
that you can sell to businesses first, but that's unlikely.

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oomkiller
We are using this model of financing at our business. Up until reading this, I
didn't know there was a name for it. This method will probably only work for
certain types of businesses though, especially one's that can't get customers
to prepay for service, or are not subscription based.

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wlievens
Even large corporations do this, when developing a large project for a "lead
customer".

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keltecp11
The actual sale itself takes time... drafting proposals, speaking to the right
people, etc. I think the author down played that a little bit.

