The customer funded business

The matchmaker business model facilitates transactions between buyers and sellers without taking ownership of the goods or services being exchanged. The matchmaker enables connections, provides a platform for the exchange, and charges fees or commissions.

This capital-efficient model requires little upfront investment and has potential for rapid growth if executed properly. Matchmakers create marketplaces connecting supply and demand. Revenues come from fees paid by buyers, sellers, or both for completed transactions. Early Internet-era examples were eBay and Expedia. More recent successes like Airbnb and Dogvacay solve real marketplace problems by matching buyers and sellers.

Airbnb launched in 2007 to address the $51 billion travel accommodations market. By matching property owners with spare capacity and travelers seeking lodging, Airbnb took advantage of fragmented supply and demand. Just six years after founding, Airbnb offered 500,000 listings in 192 countries.

Similarly, Dogvacay matched pet owners needing temporary pet care with animal lovers willing to board pets. Introduced in 2011, Dogvacay tapped into substantial unsatisfied demand in the pet services industry.

The pay-in-advance business model, where customers pay for products or services before they receive them, has been a key strategy for startups looking to fund their growth. This model was notably used by Michael Dell, who sold custom-built computers from his dorm room, requiring customers to pay before their devices were assembled.

Similarly, companies like Banana Republic and Costco have successfully employed this model, generating revenue through membership fees before any purchases are made. In the realm of e-commerce, Threadless, an online community for artists to sell custom t-shirt designs, has seen rapid expansion thanks to the pay-in-advance model.

Starting with a modest initial investment, Threadless used customer payments to finance production, diversifying its product range over time. Another example is the Indian travel startup Via.com, which became the country's largest domestic travel agency within seven years, leveraging advance bookings to fuel its growth.

The subscription business model is a prevalent approach in the publishing industry, where customers pay a recurring fee to receive goods or services over time. This model is particularly effective when there is consistent demand, customers prefer automatic delivery, and the cost of subscribing is less than making individual purchases.

Customers may pay for subscriptions upfront, in arrears, or on a regular basis for future deliveries. This model is suitable for items that are regularly consumed, such as newspapers, and for software and services where customers desire the most current versions without any inconvenience.

For instance, in 2012, subscription revenues for software in the United States surpassed $56 billion. The appeal of software-as-a-service lies in its affordability, automatic updates, and included support. Subscriptions offer a reliable revenue stream, allowing businesses to accurately determine the lifetime value of a customer, the cost of acquiring them, and the overall profitability.

Challenges include maintaining the freshness of the offerings and reducing customer churn. Long-term subscribers can significantly enhance cash flow. The subscription model is advisable for products that are consistently used, like disposable diapers, or those that necessitate the latest updates, such as software.

The scarcity business model is designed to create a sense of urgency among customers by offering products in limited quantities or for a restricted time frame. This strategy encourages consumers to act quickly to avoid missing out on the opportunity to purchase. It's a model that requires customers to pay upfront, which helps businesses minimize their working capital needs since they receive cash before delivering the goods. Suppliers are typically paid after the sale, enhancing the capital efficiency of this approach. The success of this model hinges on having an offer that is so compelling it triggers impulsive buying behavior.

One of the most notable examples of this model in action is Zara's fast fashion strategy. The brand frequently introduces new styles in its stores in limited quantities, prompting customers to make purchases promptly before the items sell out.

Similarly, Ventee-Privee, a French online retailer, has capitalized on this model by hosting short sales events. They offer fashion items at significant discounts, sometimes up to 70% off, but only for a limited period of 3-5 days, which creates a frenzy among customers to buy before the sale ends. This approach to flash sales has been a key driver in Ventee-Privee's growth, allowing them to generate substantial annual revenue.

A smart business strategy involves initially offering customized services to clients and then using the insights gained to develop a product that appeals to a broader market. This approach effectively allows early customers to fund the development of the product.

A classic example of this model is Microsoft, which was contracted by IBM to provide an operating system for their new personal computer. Bill Gates and Paul Allen negotiated a deal that allowed them to license the software to other companies as well. They adapted an existing product to create their DOS system, and with IBM's support, they were able to create a product for the mass market, transforming Microsoft from a service-oriented company into a leading software product company.

Contemporary examples of companies adopting this service-to-product approach include Go Viral, a Danish company that initially created customized viral advertising campaigns for ad agencies. Through this experience, they developed the expertise to launch their own online video distribution platform, which was later sold for $97 million. Another example is Rock Solid, which provided IT support for Microsoft products and used its experience serving Puerto Rican government entities to develop a cloud-based SaaS product that could be marketed globally.

What's the first step? For new businesses, the paramount goal should be to start generating revenue immediately. Avoid the early pursuit of investors and instead, concentrate on creating a product that offers immense value, compelling customers to pay. History is filled with examples of successful companies that grew through customer revenue rather than external funding. Consider adopting one of these customer-funded models:

- Direct sales with upfront payments - A subscription model for recurring revenue - A marketplace that earns from transaction fees - A freemium model to convert users to paid premium features - Building a community to later monetize

The focus should always be on satisfying customers over investors, allowing for product refinement while maintaining financial stability through continuous customer revenue. This approach ensures businesses can grow with customer support.

How do I start?

To initiate a customer-funded business, seek out an incubator or accelerator that prioritizes customer acquisition over venture capital. Such programs offer crucial advice and networking opportunities. Engage with business angels interested in your customer base rather than financials, and build relationships with them before you need funding. This approach sets you apart as you're not immediately seeking investment.