The Customer-Funded Business—A Conceptual Analysis

Abstract

John Mullins’ The Customer-Funded Business (CFB) (Wiley, 2014) focuses on entrepreneurial and start-up cases where customer funding, often referred to as “the magic of traction”, is sufficient to make the venture succeed. Customer funding is a necessity for those start-ups that do not obtain financing from the traditional, usual sources—corporate and venture capital. Second, certain businesses are natural candidates to be set up in this way, as they provide self-sufficient customer funding. This is the case with, for example, matchmaker, pay-in-advance, subscription, scarcity-based, and service-to-product models. Third, Mullins believes the concept is so useful and powerful that it may generate an authentic revolution in entrepreneurial endeavors. In this note, we complement Mullins’ analysis with additional material that strengthens his CFB strategies. We first clarify the components of any customer-funded strategy: working capital and cash-conversion cycle, cashflows dynamics, and production intensity. These components provide a wider context that, in turn, enable us to review the role of customer-funded strategies in practice. We review the cases of about one hundred start-ups. Our study strengthens the case for CFB strategies, not only for financing reasons, but also to protect the interests of the start-up’s founders.