Tapping customer cash to sponsor your start-up

“Money is only a tool, it will take you wherever you wish, but it will not replace you as a driver” Ayn Rand
In todays’ entrepreneurial spree, the terms like angel investments, venture capital (VC), crowd financing are so highly ranked that starting a start-up seems a cake walk. At least, the angels, crowd financing and VCs take away the first biggest hurdle to execute the great business ideas. One person every 150,000 Indians is aspiring for initiating start-up. The notion is that the short-cut to being richis to have a great business idea, arrange finance from the venture capitalists, angel investors or in crowd funding and immaculately accomplish success.
The recent Nasscom report is also an encouraging for the start-ups, according to which India has progressed to third position after the USA and the UK in the total count of the start-ups. India is found to be projecting commendable growth from the year 2015-20 with 9.5% nominal growth, where India ranked first among USA, the UK, Israel and China. The report projected that the rate of the start-ups initiating the new business has increased from 3-4 per day in the year 2015 to 6-7 per day by 2020. The next great news for the Indian start-ups is that the growth rate in India is exceeding the China’s growth rate in the year 2015. The enhanced growth rate is accentuated by the various reforms on ease of doing business, better governance, reduced inflation and reforms on digitization, among other initiatives. With increasing number of the venture capitalists at 156 and angel investors at 300 in the year 2014, Indian investment still contribute only 5% share of global VC funding. Thus, the next question arises what exactly is the criteria to attract VC funding?
The recent research supported that the businesses catering a smaller market than $1 billion of net revenues in the time span of 5 years fail to attract VCs and angels’ attention. The significant market sharebolsters against the possible future market entrants and strive to combat that level of business scale. With this criteria, the petite business models like gardening, music listening groups, or some models for the challenging sections of the society might not fit in it, however the whopping e-commerce, food and beverages, healthcare, might hail here.
Having talked about the business scale, the new start-up model should counteract bootlegging business model, else there is no dearth of the business to introduce the new business model to their existing line of businesses. The promoter’s qualification and professional experience, innovative projects undertaken also attracts the funding from VCs and angels. The extent of imitation can be conjectured from the patents filed for that business idea, and lead time to duplicate.For instance, the ecommerce models with already existing Flipkart, Snapdeal, Amazon might fail to attract many new VCs and angels.
The question arises here that how many business ideas get funded and are able to give good returns to the investors? According to Nasscom and Zinnov, 2015 report, total financing reaching the Indian startups till 2015 was estimated at $6.5billion, but one thig to be noticed that this the major funding has been for the technology related business ideas like ecommerce, analytics, health technology, payment portals among others. According to the Bain VC and PE report, the total number of the funds reaching India has grown by 40% during 2013-14 and India witnessed total of 456 funds. Having appreciated the growth, the number might not look very impressive in comparison to the number in the United States which is approximately 301,300. Thus, two prime issues have been identified here:one is available of the seed, angel or VC, and second is concentration of the funding for the technology related business ideas.
The research team led by John Mullins have suggested some business models which employs the customer cash to execute a business idea. These business ideas can be the rescue for the cash starved startups. He researched on these business ideas after being exposed the foundation of Airbnb. The founders of Airbnb helped some conference graduates by offering them the space in their homes during the conference, and a year later they formally announced the same as their business idea-helping people find an affordable and home-like place to stay. Airbnb made a great headline about their fetching the million dollars venture financing, however, there actual growth came from the advance booking amount that the customers pay them. This advance from customers helped them grow organically and be least dependent on the external financing as most start-ups are. Technically, this is also termed as negative working capital.
The businesses models that require a middleman services to bring together the customers together, for instance the real estate brokers who have no products to sell, but builds trust between two unknown customers and deploy their expertise in carrying out the property deal smoothly and legally. The business models like Yatra.com, expedia.com help customers find the required flights, hotels, or complete tour packages. Ebay also fits in this model of providing a platform to bring the buyer and seller together and charges the fee for their services. Tutorhunt.com is also peculiar for bringing the teachers and students together, thereby charging the commission. The peculiar feature is that the huge investment is not required for the products.
The news headlines like Maruti is accepting the advance booking for their new sub-compact SUV-VitaraBrezza can also be the pathway for some startups where they can come up with the business idea of seeking advance for the job to be done. Consider the model of the construction contractors, who work on the advance payments. The ‘Via world’, formerly ‘Flight raja’, identified that the penetration of the internet users were very limited in India. The website provided real time space to travel agents, for which they sought a deposit of Rs. 5,000 from travel agents. This business was in profits just three months after foundation and was able to attract VCs subsequently. The businesses seeking advance subscription requirements like the coaching centers, newspapers, cable networks, can also flourish on negative working capital.
The youth aspiring to start a startup which is cash starved can count on the aforementioned business ideas to quickly grow and grab the VCs and angels attention. The growth of the new businesses that can prove themselves viable in a short span of time cannot be prohibited. Thus, finance is not the only factor that holds back a startup, it’s the drive in the founder to prepare a business plan given the resources constraint; which can be managed using customer cash, or working out the negative working capital model for your business.