It’s definitely the age of entrepreneurship as more and more youngsters choose to give up cushy and paying jobs to start their own businesses. But where is all the money coming from to help startups take off? While the traditional routes of business loans, venture capital (VC), angel investors, and public or private grants continue to fund capital-intensive projects involving manufacturing plants or other infrastructure, the world view of doing many other businesses is slowly but surely changing. From being investor-centric, new companies are now majorly looking up to the customer to help them get started. And keep going.Let’s take a look at some of the ways in which startups use negative working capital, that is customers' money, even before they sell their goods or services.
As the name suggests, the startup using the matchmaker model plays the link between buyers and sellers. This does not involve any inventory and the cost of products sold is also low. Stores selling second-hand items and real estate brokers have used this model for years. In recent years, eBay and Expedia have succeeded using this method.
This C2C model is gaining popularity on account of its ‘power of collaborative consumption’ that leads to the sharing of resources. Airbnb, which has raised over $120 million in funding from blue-chip VCs and lists over 200,000 properties in 2,600 cities in 192 countries, began business using this method while renting airbeds along with breakfast to conference goers. Running on similar lines are peer-to-peer lending site Zopa and DogVacay, a pet-sitting start-up.
The deposit model is mainly used for B2B or B2C settings in which the work takes place over time rather than a single transaction. Consultants and architects around the world use this model of asking the customer to deposit money upfront even before delivering the product or service.
The model can be best explained using the example of India’s travel start-up FlightRaja, now Via, which appeared on the scene when there were very few broadband lines. This gave them the impetus to bridge the gap between consumers’ difficulty in finding tickets online and the limited ability of travel agents to issue tickets in real time. What FlightRaja did was to get travel agents deposit $5,000 in lieu of real-time connection and ticketing capacity. At the end of one year, the startup had signed up 3,000 agents in 290 cities and was issuing 5,000 tickets a day. By 2012, its annual revenue touched almost $500 million.
Started by newspapers and magazines, the subscription model is now common in the digital era, including television content. It offers a product or service on a continual basis for a recurring charge that occurs annually, monthly, weekly, or daily. These days, this model is commonly used by online services and media companies. Using this, companies aim at improving their cash flow while providing greater value over time. This strategy helps when customers are not willing to pay a high amount right at the start. It has gone mainstream with companies like Dropbox, Netflix, Adobe, and Zipcar.
Based on B2B or B2C settings, this model is also used to sell consumables such as organic vegetables and vitamins. It has been the key to the growth of TutorVista, an online tutoring services company launched by Krishnan Ganesh. Within 14 months of its launch, the company had signed up 2,000 students in 13 countries and hired 240 teachers. In 2011, when it sold a controlling share to Pearson, it was the largest private employer of teachers in India and had a market valuation of $213 million.
Fit for a B2B setting, the mantra in the standardise-and-resell model is to create a custom service or product for one client and adapt the same to the needs of other customers. It is mostly employed by startups to develop technology or systems so that people no longer have to do processes manually. An example of this is Microsoft, whose founder Bill Gates got a contract to provide an operating system to IBM. The same software became the basis of Windows that is now sold on most PCs.
Another example of this model is MapmyIndia. Rakesh and Rashmi Verma approached Coca-Cola, Cellular One, and other companies to obtain contracts for creating digital maps. They received advance funding to make high-quality maps, which they later modified to sell to other clients. They soon moved to online maps, navigation devices, fleet-tracking solutions for taxi and truck companies, and mobile apps.
Involving a B2C setting, the scarcity model motivates customers to buy early and quickly. It focuses on the limited supply of a product or service with the aim of increasing sales through pressure. Many people end up buying such a product or service for the fear of missing out. Pressure can be built using gimmicks such as time-based deadlines, limited quantities, reduced prices, freebies, or status symbol.
Zara, the spanish pioneer of the fast-fashion concept, creates more than 10,000 styles a year with limited-edition designs moving from its studios to its stores in less than two weeks. Buyers know that the assortment is likely to change next week, so they quickly buy items they like. Gilt has ‘private’ sales for a limited time, thus customers pay for orders before the company commits to purchasing goods from the vendor.
Customer-funded models do not necessarily fit the bill for all businesses, yet these are the bases for many startups with novel ideas. After all customers, as we have seen, not just purchase products or services but also provide the much-needed fillip for a company’s growth and evolvement right from the start.
|When & how
|Care to be taken
|Used for C2C settings in which there's a need for middlemen who can connect buyers and sellers.Always begin small
|For this model to be successful, it is important to strike a balance between the numbers of buyers and sellers
|eBay, Expedia, Airbnb, real estate brokers
|Works best for B2B or B2C scenarios, where the work happens over a period of time. Ask for deposits before taking on the work
|If customers are not willing to pay, your business may not be in demand
|Via, easyFairs, consultants
|This model isideal for B2B or B2C settings in which consumables or services, including entertainment, are sold.Begin with subscriptions for a short time and push for renewals
|If the renewal rate is low, you may have to rethink about the subscription amount
|TutorVista, gym, channels, newspapers
|Standardize and resell
|This is a B2B model in which you create a product or service for one customer and then improvise that to sell it to many more customers. If it requires manual labour, the business will be difficult to scale
|You have to be patient to reap the benefits of a business run on this model
|Microsoft, MapmyIndia, GoViral (AOL’s Be On)
|A B2C model, it can be used for a wide range of products which are limited in numbers. This means, once a product is out of stock it should remain out of stock
|Resist the temptation to repeat popular products when out of stock. That's one major rule of this business model
|Fashion labels, Vente-privee, Gilt, Privalia