It’s the dream of every small business founder to put together a great business plan, lay the bare bones in place, and present that fund the venture capitalists or angel investors, and secure a round of funding to secure their future in the crowded start-up marketplace. The reality is most businesses never get an infusion of start-up funding. The majority of businesses are built using clients as the new investors.
When a business is using clients as investors, they are building their business without using any outside funds. They may work another job to pay the bills while they build their business, or go into credit card debt to have some money to invest. But by and large, any money that is invested in the business comes from product or service sales to clients. This effectively makes clients a business’ only investors, and gives them an increased level of importance, as they aren’t only paying the salaries of the business’ staff members, but paying for the growth of the business itself.
There are downfalls to this type of business building. Without an infusion of cash, a business may not grow fast enough to be sustainable. When clients are the investors, principals in the business must spend a tremendous amount of time making sure that there is a steady supply of clients, especially once the business has bills to pay such as staff, marketing, and office space rental.
When you’re always chasing new clients, it can be difficult to put energy into developing other aspects of the business. Further, when you’re bootstrapping your business, you often have to do much of the work yourself because you can’t afford staff. This can lead to long days, longer nights, and having to make do with what you can manage. This can be a catch-22 when you’re looking at expenditures such as web design. Having a professional web design is important to having a professional image on the web, but that’s a huge financial outlay when your clients are your only investors.
However, just because a business must grow slowly doesn’t mean it won’t grow at all. Dell computers were developed in the dorm room of founder Michael Dell (source: https://en.wikipedia.org/wiki/Dell). He did get a $1000 fund infusion from his family, but within a year, Dell designed and built his first computer, which sold for $795. WooThemes, a company that develops high end WordPress themes, and has developed the WooCommerce plug in for WordPress, was bootstrapped, and is now used on almost 400,000 internet sites. Media giant Gawker was founded in 2002 by Nick Denton. Gawker Media now owns more than twenty websites, including Jezebel and Gizmodo.
Despite the potential for small growth, many start-up founders believe that there are more benefits when your clients are your only investors. First and foremost, you retain more control over your company. This is an essential necessity for many business owners. Next, as odd as it may seem, when your clients are your investors, you have more control over how fast your company grows. Not everyone wants their business to blow up overnight. If someone has small children or is trying to finish college, slow growth may be ideal for the first several years of a business. Because start-up founders are often learning on the job about the many aspects of running that business, slow growth may be more beneficial in the beginning. Slow growth also allows for businesses to be able to hire responsibly. A period of quick growth can make it tempting to hire staff members to ease the burden on the founder, but then a later slow-down can put those people out of a job later.
So are customers the new investors? No. For hundreds of years before venture funding came along, customers were the primary investors in most businesses. Coca-Cola was started without a large influx of outside funding. The King Arthur Flour Company was founded in 1790, and operated without significant investment for over 100 years, before being reorganised as a joint-stock company.
In truth, while we hear about start-ups securing millions of dollars of funding, most businesses are built with customers as the primary investors. This isn’t a new way of building a business. This is the way business is built.