Customer-Funding Your Startup

Bootstrap vs VC is such a tired argument. Do what you think is best for you. Pro tip: Nobody knows what they’re doing. We’re all winging it.
— Josh Pigford (@Shpigford) September 3, 2014

I was invited to attend a talk later this month entitled, “The Customer-Funded Business: Start, Finance or Grow Your Company with your Customer’s Cash.” I have mixed feelings about this topic which I decided to share today.

We sold our first software license in Jan 2009. And sales took off from the start. We were getting sales from big companies with deep pockets. We needed to grow, and we decided to approach our customers to try to raise money.

Our idea was to provide these customers with input into our product development roadmap, steep discounts on future licenses, and premium service and attention in return for advance payment. We were seeking $100k from each of those large customers.

I spent quite a bit of time personally trying to establish those relationships. None of my efforts worked. The whole concept fell flat. After that experience, I walked away with the following pros and cons in my mind about seeking to fund a startup from customer cash.

Pros:

• Maybe it turns out to strengthen and deepen your customer relationship
• Maybe your equity won’t be as diluted as if you raise from venture firms

Cons:

• Maybe by sharing your company’s predicament and financial stress to your customers, you end up scaring them away. Maybe they do not want to do business with you since you are such a small fish.
• Maybe they will want just as much equity as a venture firm, without being as professionally savvy about acting in the role of a venture firm.
• It will consume a lot of your time.
• Maybe the customers that invest will want to limit you from doing business with their competitors.
• Maybe you should just be selling more of your product or more pre-orders for your product, rather than seeking financing for your startup.
• Maybe customer money (like strategic money) can limit your ultimate exit options.

Financing an early startup is tricky and requires fishing with multiple lines and going on a raising money blitz.

What are your thoughts about customer-funding your startup?