Is 2016 they year of the dead unicorns?
John Mullins: Use customer funding to get your start-up venture off the ground
In 2015 entrepreneurs around the world were mesmerised by the rapidly growing number of private companies – some 229 at last count in January 2016 – that had reached valuations of US$1 billion or more, based on the pricing at which they had successfully raised investment capital.
Unicorns, they’ve come to be called, and they include such companies as Uber at $51bn and Airbnb at $27bn. Even Chinese (Xiaomi at $45bn) and Indian companies (Flipkart at $15bn and SnapDeal at $4.8bn) have made the list, although there appear to be none in the Gulf just yet.
Perhaps the latter fact is a good thing, as 2016 is starting to look like the year of the dead unicorns. Why? We’ve begun to see the first signs that some unicorns’ valuations simply aren’t real.
Consider Gilt Groupe, the high-flying American flash sales pioneer and one-time unicorn which recently sold for a mere $250 million, a price that falls short of the entire $280m its investors had given it. Or listen to Salesforce.com’s founder and chief executive Marc Benioff, whose prediction at Davos of what lies ahead was straightforward: “There’s going to be lots of dead unicorns”.
So should raising venture capital – which is, after all, how most unicorns have been nurtured and fed – and shooting for the moon be seen as the holy grail, the first port of call for getting your nascent entrepreneurial venture off the ground? Perhaps not.
Is there an alternative to VC?
Indeed, there are five novel approaches that scrappy and innovative 21st century entrepreneurs have ingeniously adapted from their predecessors like Michael Dell and Bill Gates. What they have in common is that they started and grew phenomenally successful businesses largely with their customers’ funds. How might one do so?
• Matchmaker models
By bringing together buyers and sellers but not owning what is bought and sold, today’s matchmakers build great companies with virtually no start-up capital. At Airbnb, for example, the initial investment in 2007 was for a couple of air mattresses on the founders’ San Francisco apartment floor. By narrowly focusing on conventions that were too big for the city’s hotel inventory, Brian Chesky and Joe Gebbia built their business one step at a time until they got noticed in 2008. VC funding then followed, and the rest is history: a million properties in nearly 200 countries.
• Pay-in-advance model
Bangalore’s Vinay Gupta built Via into the “Intel Inside” of the Indian travel industry. How? By asking India’s mom-and-pop travel agents for a rolling $5,000 deposit in advance in return for real-time ticketing capability and better commissions than the airlines were giving them. Signing up 170 agents in the first two months gave Mr Gupta $850,000 in cash – his customers’ cash – with which to start and grow his business.
• Subscription models
Krishnan Ganesh started TutorVista with three Indian teachers and a VoIP internet connection reaching American teens who needed help with their homework. He quickly learnt that $100 per month for “all you can eat” – paid monthly in advance – was just what the teens’ parents wanted. When renewal rates after the trial subscriptions quickly materialised at north of 50 per cent, growing the business was simply a matter of adding more fuel. He sold the business to Pearson in six short years for more than $200m.
• Scarcity models
Jean-Jacques Granjon created the flash sales phenomenon by doing something simple for Parisian designer apparel makers who needed to move unwanted inventory. By collecting payment from his “members” who responded to his company’s online three-day sales events with strictly limited quantity available at discounted prices, and by paying his vendors long after the goods had been ordered and shipped, Mr Granjon didn’t need any capital to start or grow what became one of France’s hottest fashion brands, Vente Privée.
• Service-to-product models
Claus Moseholm and Jimmy Maymann of GoViral, a Danish company created in 2003 to harness the then-emerging power of the internet to deliver advertisers’ video content in viral fashion, funded their company’s start-up and growth with the proceeds of one successful viral video campaign after another. In 2011, after having turned their service business (creating and hosting viral video campaigns) into a product platform that stood on its own, GoViral was sold for $97m, having never taken any external investment at all.
A way forward for you?
Whether you’re an aspiring entrepreneur lacking the start-up capital you need, an early-stage entrepreneur trying to get your cash-starved venture into take-off mode, a corporate leader seeking to grow an established company or an angel investor, mentor, business accelerator or incubator professional who supports high-potential entrepreneurial ventures, a customer-funded approach offers the most sure-footed path to starting, financing, or growing your business or those you support. In the words of Shanghai’s entrepreneur and angel investor Bernard Auyang: “The customer is not just king, he can be your VC too”.
John Mullins is an associate professor of management practice in marketing and entrepreneurship at London Business School and author of the widely acclaimed book The Customer-Funded Business (Wiley 2014). His latest project is How to Finance and Grow Your Startup – Without VC, a Massively Open Online Course. Enrolment is free of charge.
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