book.chapter The benefits of client capital

Raising capital is hard work. The problem is that while you focus on appeasing investors, you lose sight of serving your customers. A better way to start and grow your business is to use your customers' money rather than relying on outside investors. This customer-funded approach has several clear benefits. First, you stay focused on what your customers want enough to pay for. You avoid getting sidetracked trying to cater to fickle investors. This matters because long-term, your customers influence the fate of your company far more than investors do. When customers fund your operations, they gain a vested interest in your success. They want you to stick around to provide service and support. Having customers actively cheer you on is invaluable. When you tap customer cash to finance growth, you must be lean and creative to survive. That forced frugality and inventiveness is actually an advantage, not a handicap. It pushes you to run your company more efficiently and make every dollar count. If you later opt to pursue venture capital, your existing customer traction will minimize investor risk and strengthen your negotiating position. Most importantly, customers serve as an unforgiving judge and jury. If they do not buy what you offer, your flawed ideas get weeded out through natural selection. Customer purchases validate that your product-market fit is genuine, not theoretical. And nothing beats cash flow from real customer sales when it comes to sustainability. If you can achieve consistent positive cash flow, however modest initially, your business gains breathing room to try to scale up those early revenue streams. In contrast, raising outside capital too early is dangerous. Investors usually demand large ownership stakes, especially if your business is still finding its way. The pressure to take their money may tempt you to give away too much equity too soon. With customer funding, you sidestep this perilous scenario altogether. Here's another major advantage of using customer cash: most startups do not succeed on their first try. As you build out your offering, you often must iterate from Plan A to Plan B to Plan C and beyond before striking gold. That process of trial-and-error and constant refinement is difficult when investors are hovering over your shoulder. But it fits perfectly with a customer-funded approach. The management guru Peter Drucker made this great observation about new companies that do manage to take off: "If a new venture does succeed, more often than not it is in a market other than the one it was originally intended to serve, with products and services not quite those with which it had set out, bought in large part by customers it did not even think of when it started, and used for a host of purposes besides the ones for which the products were first designed." Relying on customer funding allows that same flexibility to pivot as market feedback directs until you unlock what Drucker termed "the theory of the business."