Who Needs Investors?
@John_W_Mullins
London Business School
© John Mullins 2015
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Bill Sahlman Puts it Simply
“The best money comes from
customers…
not investors.”
© John Mullins 2015
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Is Sahlman Right?
© John Mullins 2015
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And What About Start-Ups or
Your New Ideas?
• Fred Wilson: Union Square Ventures
– “The amount of money that start-ups raise
in their Seed and Series A rounds is
inversely correlated with success.”
© John Mullins 2015
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Why Might This Be So?
– Talk with your neighbor
• 2 minutes
• 3 top reasons, please
© John Mullins 2015
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Why Might This Be So?
• My take on it:
– Too much money makes entrepreneurs
sloppy, stupid
– Plan A for any new idea rarely works. But
the investor wants the entrepreneur to
(flawlessly) implement it anyway!
• Question: Might it be wiser to follow
Sahlman’s advice? But how?
© John Mullins 2015
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Here’s How Not to Do It
© John Mullins 2015
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© John Mullins 2015
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So, Would You Invest in Ali G?
• Fact: the vast majority of fast-growing
businesses never raise venture capital
(nor write business plans, either)
• Nor should they, I argue: why?
• Raising capital (especially too early) –
whether from angels or VCs – is a
dangerous practice, on both sides of
the table
© John Mullins 2015
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The Killer Drawbacks of
Raising Venture Capital
• Distraction: takes the entrepreneur’s eye
off the ball, now, and later, too
• Higher risk = lower stake for the founder
• And the baggage that comes with it in the
shareholders’ agreement
• Is this good news for the investor in such
a deal?
© John Mullins 2015
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Let’s Consider Some Evidence:
US Venture Fund Returns
Returns from inception to 12/31/11.
Source: Josh Lerner analysis of Thomson/Reuters data.
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© John Mullins 2015
So, Is There an Alternative?
The Customer-Funded Business
Matchmaker
Models
Service-to-Product
Models
Pay-in-Advance
Models
Your
Customer
Scarcity-Based
Models
© John Mullins 2015
Subscription
Models
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Is Anything New Here?
– Talk with your neighbor
• Identify examples of companies that
have actually put one of these models
to work – maybe even yours!
• Two minutes – go!
© John Mullins 2015
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Is Anything New Here?
• Pay-in-advance models: Consultants,
architects, Dell. Nearly all services, too.
• Matchmaker models: eBay, Expedia
• Subscription models: Periodicals, Netflix
• Scarcity models: Zara
• Service-to-product models: Microsoft
• But let’s look at some savvy 21st century
entrepreneurs putting them to use
© John Mullins 2015
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Vinay Gupta 2006:
A Pay-in-Advance Model
© John Mullins 2015
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Brian Chesky & Joe Gebbia 2007:
A Matchmaker Model
© John Mullins 2015
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Krishnan Ganesh 2005:
A Subscription Model
© John Mullins 2015
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Krishnan Ganesh 2005:
A Subscription Model
© John Mullins 2015
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Jacques-Antoine Granjon 2001:
A Scarcity Model
© John Mullins 2015
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Balder Olrik, Claus Moseholm 2003:
A Service-to-Product Model
© John Mullins 2015
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These Examples Share
Three Attributes in Common
• Negative working capital – love thy float!
• They required essentially no external
capital to get started
• When they did raise capital to grow
once the concept was proven, there
was an eager queue of angels or VCs
lined up at their doors
© John Mullins 2015
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So, What About You?
• Which of the five models might be put to
work in your business – tomorrow?
– Pay-in-advance model
– Matchmaker model
– Subscription model
– Scarcity model
– Service-to-product model
Talk with your team: which might work?
• 5 minutes
© John Mullins 2015
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So, Which Did You Choose?
Matchmaker
Models
Service-to-Product
Models
Pay-in-Advance
Models
Your
Customer
Scarcity-Based
Models
© John Mullins 2015
Subscription
Models
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Have I Said This is Easy to Do?
• No! But it’s what many of you already
intuitively know
• Now there’s a set of tools – five models –
you can use
• Can you do this for every business?
• But note: Have we seen here both goods
and services, both B2B and B2C?
© John Mullins 2015
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So, Is Venture Capital Bad
for Growing Your Business?
• Not necessarily. It’s the timing that
concerns me.
• And it concerns Fred Wilson, too!
• If you’ve found a venture that’s clearly
firing on all cylinders, that’s when to add
fuel!
© John Mullins 2015
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A Final Observation on
Business Plans
“We believe that…
© John Mullins 2015
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For the “When-to”, the “How-to” and
the Pitfalls to Watch out for…
One of 5 “not-to-bemissed” books, 2014
Number 1 in venture
capital, Amazon.com,
November 2014
© John Mullins 2015
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In a Nutshell…
“The customer is not just king.
He can be your VC, too!”
Bernie Auyang
Angel Investor and Entrepreneur
Shanghai
© John Mullins 2015
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Questions?
jmullins@london.edu
www.TheCustomerFundedBusiness.com
@John_W_Mullins
© John Mullins 2015
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