Negative Working Capital is a Positive for Startup Funding

By Nick Bentley

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Imagine creating your startup without raising any capital whatsoever, simply having your customer’s cash in hand before you have to produce any type of product or service. Sounds a lot better than trying to raise up huge amounts of capital just to develop, produce and launch your product, right? Well, with the proper lean development techniques and a startup model that utilizes growth hacking and alternative funding sources, this scenario isn’t so farfetched. In fact, it’s quite commonplace and you’re probably already acquainted with—or even a member of—some companies that take your cash before delivering your product.

Negative Working Capital for Funding

This is called having a negative working capital and it’s an amazingly powerful way to fund your startup. The concept is to have the customer’s money in hand before you deliver the product. Funding your startup like this can be very simple or very complicated—it all depends on your level of involvement, passion and ideas on the matter. For simplicity’s sake, the easiest way to do this would be to go to a crowdsourcing site and sell pre-orders for your product.  

With the money you make selling pre-orders, you use it to create the rest of your operation and setup. Then, when you reach your funding goal and are set up for production and distribution, you can simply turn a profit by running off and selling more product. A great way to look at these types of negative working capital funding campaigns is by seeing the funders as early adopters. They are investing in your product because you’ve intrigued them enough—if they aren’t investing, you need to intrigue them more.

Five Types of Customer Funded Business Models

When it comes down to it, there are five main types of customer funded business models, all of which provide excellent examples of just how powerful negative working capital can be:

1. Matchmaker—Popularly used by real estate brokers, eBay or Expedia. Simply involves matching the supply to the demand—the go-between so to speak. Successful startups that have used the matchmaker business plan for funding include Airbnb, Dog Vacay and Wonga.

2. Pay-in-Advance—Popularly used by contractors and architects. Involves getting the cash upfront to cover costs of services, goods, etc. Successful startups that have used the pay-in-advance business plan for funding include Via, EasyFairs and Studenterbolaget.

3. Subscriptions—Popularly used by newspaper and television service providers. Provides a set parameter of content or service for a fee-based subscription. Successful startups that have used the subscription business plan for funding include TutorVista, Massage Envy and Yammer.

4. Scarcity—Popularly used by Zara. Concepts revolve around having—or creating the illusion of—limited supply to drive up demand. Successful startups that have used the scarcity business plan for funding include Vente Privee, Gilt Groupe and Privalia.

5. Service-to-Product—Popularly used by Microsoft. Involves a service that only comes when the customer buys the product. Successful startups that have used the service-to-product business plan for funding include MapmyIndia, Vera Solutions and GoViral.

Which Customer Funded Business Plan is Right for My Startup?

No matter what type of startup product you have and which level of development or growth hacking you are at, at least one of these five business models can be tweaked to fit your funding goals. Even if the funding won’t raise all of your startup costs, just having another financial stream coming into your coffers is going to help—unless of course, you can afford to turn down money! Assuming that the goal of your funding is to make money and not turn it down, the only thing left to do is implement your funding strategies. To find out more about the best ways to go about this, click here  right now.

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