The ideal situation for most startups is when you have customers ready to put down money for your product or service. That being said, it can be quite difficult to convince customers to pay you for a product that has not yet materialized. This sort of financing is called customer financing, or in a different variation it can be known as Crowdfunding.

Why customers are a great source of financing?

  • They want your product, not your equity
  • Early adopters can help bring your product to market (word of mouth)
  • Can help you pinpoint the target, by seeing the type of people interested in your product.
  • Will help you debug the product by getting feedback from early adopters; basically conducting market research and testing at the same time.
  • Bring credibility to other customers/investors – the late bloomers will be happy to adopt when they see that there are people who already are using the product.
  • Early adopters tend to stay longer and more loyal to the company and the product.

The most common way of customer financing is to sell the product before or while its being built. The problem here is that it will take some really good convincing to get a customer to buy into an idea. It is not impossible; it is just a bit difficult.

But if you do manage to convince them to put money down, then you may be on the right track. Portals like KickStarter.com are there to encourage such crowdfunding/customer financing models. These portals allow you to put up your project for funding from the community. Depending on the donation amount, you can offer to give something back. For example, if you donate more than $100, the Kickstarter may offer you a piece of the product, or a mention on their site to name a few kickbacks for your support.

The crowdfunding concept helps the entrepreneur get their product off the ground and the consumer gets to help push a new idea forward, sprouting more innovation.

All being said, this may not be the best type of financing for every startup. You may have different requirements to help you build your project. Certain projects require really huge amount of funds, or expertise from investors that crowdfunding may not provide.

There are pros and cons to this model, but if you are looking for a different way to raise money, looking for market research and a customer base, this is an option you could explore further.

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