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Transcript of Use Customer Cash to Finance Your Start-Up
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Use Customer Cash To Finance
Your Start-Up
July-August 2013
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John Mullins
By
D.Ravi Varma (B605)
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About Author:
John Mullins.
He is a Standford MBA and Ph.d.
At present he is the faculty atLondon Business School.
His teaching subjects include
Financing the entrepreneurialbusiness, Business plan
developement and many more..
Getting to plan-B was his majorachievement.
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What do You mean by
Start-up?
The money that is required to start
a new business.
Toptomato.in Hifives.in
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Coming to the world of
Entrepreneurship Airbnb is one of the most celebrated start-ups of the past decade.
In 2007 two design school graduates dusted off some air
mattresses and rented out space in their San Francisco apartment
to conference attendees who couldnt find hotel rooms, netting
$1,000.
By 2012 Airbnb had raised $120 million in venture funding and
was valued at more than $1 billion.
The business model is structured so that advance customer cash
helps finance growth.
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Its a strategy more new businesses should consider: receiving
cash from customers before having to lay out money for the
product or service to be sold.(Negative Working capital).
One of the biggest benefits of doing so is that it allows
company founders to focus on creating, testing, refining, and
proving their business models instead of on courting
investors.
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Customer-funding model is especially helpful when traditional
forms of financing, such as bank loans, are tight, as is the case
in many markets right now.
Discover a Better Form of Financing
Many start-ups spend too much time looking for financing
and invest too much money in prototypes or inventory.
Some entrepreneurs avoid those traps by adopting business
models that give them advance access to customers cash as a
means of funding early growth.
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Title
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The Matchmaker Model
Some companies entire business models consist of
connecting buyers and sellers.
These companies do not have inventories and the cost of
goods sold is extremely low.
Example : Ebay and Expedia.
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The Deposit Model:
In deposit model the company initially accepts deposits from
public and render the services as and when recquired by the
customer.
A classic example is the travel start up Flight Raja (Now Via)
which used this model .
Initial deposit of $5000 from travel agents.
Within 2 months it had signed up 180 agents booking 200
tickets a day.
After 1 year it had signed up 3000 agents in 290 cities.
By 2012 annual revenue crossed $500 million.
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The Subscription Model:
Customer pay a predictable monthly fee in advance, the
business is high capitalefficient and it enjoys smoother
revenue growths than most start ups do.
In 2005 Krishna Ganesh hired 3 teachers in Bangalore.
Newspapers and cable networks have used subsciption
models for many years.
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The Standardize And Resell Model
Start-ups leveraging this model develop technology or
systems that do what people have been doing manually in
labor intensive businesses .
This strategy relies on offering a customer the process so they
no longer have to do the process manually and have them
provide a contract that finances your developing the tech or
process yourself.
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The Scarcity Model
Companies leveraging this model use scarcity to motivate
customers to pay and buy early and quickly.
This tactic takes advantage of the situation that retailers
normally have credit with their vendors.
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Conclusion
Each of these models allowed company founders to launch
with little or no external financing and to use the time not
spent seeking potential investors to fine tune their business.
Customer funded models dont suit every venture . Capital
intensive projects that recquire manufacturing plants other
infrastructure must almost always relay on traditionalfinancing.
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