The Customer-Funded Business – Part 2

I had the opportunity recently to interview one of my favorite professors from my time at London Business School, John Mullins. John taught a host of great entrepreneurship courses when I was there at LBS and continues to be a great teacher and a prolific writer. His latest book investigates the customer-funded business and what it takes to pursue this type of business successfully. Customer funding is different than crowdfunding, but I’ll let him tell you about all of that in his own words. His latest book is titled THE CUSTOMER-FUNDED BUSINESS: Start, Finance, or Grow Your Company with Your Customers’ Cash. This is the second part of a two-part interview with John.

You can read Part 1 of the interview here

Let’s get to the second set of questions:

9. According to your first book, The New Business Road Test, most business plans don’t deliver and are a waste of time and effort. Why is that?

“Planning without a product, without a customer, or without firsthand experience is doomed to fail. Visionaries often try to translate their passion into a business plan – one that typically teeters on a pile of untested assumptions, as nearly all business plans do. The New Business Road Test puts in place a body of evidence – about whether the market is or is not attractive; about whether the industry is actually a game in which you’d like to play and in which you stand a chance to sustain competitive advantage over time; and about whether your team is up to the task – that adds credibility to the venture and gives a new level of well-placed confidence to the entrepreneur. My new book takes things a couple of steps further and argues that customer funding makes ‘planning’ largely irrelevant, at least at the outset.”

10. Can a customer-funded approach work for every kind of business?

“No, not every kind. If you want to build a dam and a hydroelectric power plant, you probably can’t sell the power before building the dam and getting the generators up and running. But my research has shown that for a surprising range of businesses – goods and services, B2B and B2C, hi-tech and no-tech, dot-com and bricks-and-mortar – customer funded approaches can work.”

11. What are the most common mistakes new businesses and start-ups make?

“Assuming too much, testing too little, failing to learn from the experience of others, spending precious time and resources going down the cul-de-sacs of suboptimal potential, and most importantly, basing their direction on bald assumptions rather than gathering real-world evidence from the marketplace.”

12. What are the most common mistakes that investors in early stage companies make?

“I see two mistakes repeated far too often. First, too many investors think that the job of the entrepreneur – once the check has been written – is to flawlessly execute the plan that was pitched. Dead wrong. The cold, hard facts are that most of the time the initial plan includes some untested assumptions that don’t pan out. The second is the tendency to blame “management” when things go awry. So, rather than viewing the plan as something to be faithfully followed, I’d like to see investors agree that the plan is nothing more than the starting point for a learning journey to be travelled together, entrepreneur and investor, hand-in-hand.

As venture capital investor Bruce Golden of Accel Partners has remarked, “As a venture capitalist, nothing is more valuable to me than getting first-hand market feedback from customers about their experience with a new “killer” product. The best and usually shortest path to developing that killer product is by getting customers to pay for it.”

13. Is The Customer-Funded Business just for start-ups, or are its ideas applicable in later-stage or more mature companies?

“Good question. I originally targeted both my research and the book at aspiring entrepreneurs, to help improve their long odds. But I found wonderful examples of large companies using these models to grow in a more capital efficient manner.”

14. How do you see the future of the start-up process? What will change?

“We are in a crucial time for entrepreneurs. There is an opportunity to create best practices to foster innovation and conserve resources while improving the overall chances of success. We have to get smarter, not about innovation itself, but about how we take innovation to market. We need a better way than the conventional path of writing and adhering to business plans created in a vacuum while squandering money, time, and most importantly, entrepreneurial talent in the process. I believe that if every entrepreneur – and every angel – took the time to find a way to apply one of the five customer-funded models in his or her business, we’d have many more smiles on both sides of the deal table. And our economies would benefit from faster creation of new jobs, too.”

15. How does the customer-funded approach fit in with today’s trendy discussion about ‘lean’ startups?

“First of all, let me say that I’m a huge fan of the lean startup movement, and consider its leaders friends and colleagues. There are a lot of lessons to be drawn from Steve Blank’s and Eric Ries’s work for entrepreneurs once they decide to launch a new business. More of them should heed the lean start-up principles as they get started. When they do so with rigor, they will often find their business funded – without investors!”

16. Why a new book, when your first book, The New Business Road Test, and your 2009 book, Getting to Plan B, have won so much critical acclaim and continue to sell well?

“I am gratified by the success of Getting to Plan B, named the best book for business owners in 2009 by Inc. magazine, but each of the three books deals with a different issue. Getting to Plan B provides a disciplined process for guiding the entrepreneurial journey and a framework for organizing what you learn along the way. It’s focussed on the journey and the business model that will result.

The New Business Road Test is focussed on the opportunity itself and whether it is worthy of pursuit. It helps ensure that the opportunity is a reasonable starting point for what will almost inevitably be a learning journey full of unexpected twists and turns. There’s little point in setting off on either a fruitless journey or one that could, with the benefit of a seven domains analysis, have been started further down the road.

My new book, The Customer-Funded Business, abolishes the unfortunate myth that funding one’s new business means writing a business plan and going out to raise capital. This is simply not true, as the book’s stories of Michael Dell and others show. ”

17. They say that writing a book is a labour of love. What do you hope readers will take away from this one?

“Sadly, VCs and the rest of the entrepreneurial ecosystem hijacked the financing limelight a couple of generations ago in Silicon Valley and Boston and now most everywhere else. They convinced entrepreneurs that writing business plans and raising start-up funding are the twin centrepieces of entrepreneurial behaviour. It’s my hope that the new book will light the path for a different approach. According to Bill Sahlman, the entrepreneurial finance guru at Harvard Business School, there’s one clear best course of funding for a new venture. The customer.”

Conclusion:

Thank you John for agreeing to do this interview. You’ve given us so much great content for the two parts of the interview. I look forward to digging into the book a bit more over the coming weeks, and I definitely will continue to recommend The New Business Road Test to aspiring entrepreneurs and new product development executives alike to help people increase their chances of success with their new ventures.

About the Author:

JOHN MULLINS is the author of the definitive book on assessing new venture opportunities, THE NEW BUSINESS ROAD TEST: What Entrepreneurs and Executives Should Do Before Launching a Lean Start-Up (FT/Prentice-Hall, fourth edition, 2013), and an Associate Professor of Management Practice at London Business School. He is also co-author of the critically acclaimed GETTING TO PLAN B: Breaking Through to a Better Business Model (Harvard Business Press, 2009). His newest book, THE CUSTOMER-FUNDED BUSINESS: Start, Finance, or Grow Your Company with Your Customers’ Cash, was published in August 2014 (Wiley).

Wait! Before you go…

Choose how you want the latest innovation content delivered to you:

• Daily — RSS Feed — Email — Twitter — Facebook — Linkedin Today
• Weekly — Email Newsletter — Free Magazine — Linkedin Group

Braden Kelley is a popular innovation speaker, builds sustainable innovation cultures, and tools for creating successful change. He is the author of the five-star book Stoking Your Innovation Bonfire and the creator of a revolutionary new change planning toolkit coming soon. Follow him on Twitter (@innovate) and Linkedin.