Customer-funded, not crowd-funded, is the way to go: John Mullins

Interview with professor, London Business School

Professor John Mullins of London Business School discusses how three different entrepreneurial ventures in India opted for unconventional funding options on their path to success in an interview with Masoom Gupte

What role could entrepreneurs play in a nation's development? If you could talk about India specifically...

A couple of observations about the Indian business environment that I'd like to make... India is undergoing dramatic change in many ways. It has an emerging middle class, a rising GDP, increasing infrastructure and environmental challenges. What they add up to is that India needs to change for the future. India's entrepreneurs will have to step up to resolve these challenges. It is becoming quite clear that India's government will not solve these challenges. The problems are too deep and widespread for the government to be able to address the problems truly.

As India interacts with the world and vice versa, we are trying to understand what are the nitty-gritty of this interaction on a day-to-day basis.

In your research, you have stated that fast growing entrepreneurial ventures - and not start-ups - are the growth drivers. What exactly do you mean by that? The seeds of a fast growing entrepreneurial venture are sown in the start-up phase, isn't it?

Yes, but most start-ups won't get to that point. You can divide the world into start-ups, medium-size companies and huge companies. Most large companies around the world, in their endeavour to be efficient, are replacing labour with machines. Does that create jobs? This means that we can't rely on multinationals to create enough jobs to put a billion people to work for the next 10 years. It's also not going to happen with start-ups. Most of the start-ups will be micro enterprises that support the livelihood of a family or a couple of families. Another large portion of start-ups will start and fail. There is a lot of churn in the start-up community. There isn't much job creation in the start-up community either. Where does the job creation happen? It happens on the back of these medium-sized ventures that have a big enough vision, which enables them to grow fast and create jobs. My focus as an academician is to study this group of companies that can grow really fast and how such companies must be helped along for better job creation.

The thing with these companies is that they not only create jobs within their companies but also externally. Apple sometimes gets criticised in the US for not creating any jobs in its home country. But Apple has actually created several jobs. Look at the app industry. The company can be credited with having created the industry single-handedly. Companies like Apple not only create jobs within their companies but lend support to the ecosystem, creating value in ancillary streams as well.

ENTREPRENEURIAL SPIRIT

• John Mullins is an associate professor of Management Practice in Entrepreneurship and Marketing at the London Business School
• His research has won numerous awards from the Marketing Science Institute, the American Marketing Association, and the Richard D Irwin Foundation
• Since becoming a business school professor in 1992, John has published four books, numerous cases and more than 40 articles
• Among the books authored or co-authored by Mullins are The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan and Getting to Plan B: Breaking Through to a Better Business Model (with Randy Komisar, a partner at the venture capital firm Kleiner Perkins Caufield & Byers in California)

You have spoken about entrepreneurs opting for the "customer-funded" route over the "investor-funded" one in your book. Could you elaborate?

I've been researching for the past year at the London School of Business about companies that are raising their funds from their customers rather than through angels or venture capitalists. We have examples of companies that have got their customers to fund their businesses until they got to some proof points. And once you've reached certain proof points and have created something that has customer traction, it also becomes much simpler to raise capital. You've proven that there is a real business out there and growth can be fast tracked with capital infusion.

Everyone asks if customer-funded is the same as crowd-funded. It is not. There is a very distinctive line that separates the two.

Could you share some examples of the customer-funded business models?

Within the customer-funded universe, there are different business models. The first example is Via. It is the Intel of the Indian travel industry. Via has given the industry the ability to real-time ticketing, which was absent previously. The company started in 2006. Before Via, if you wanted to book an airline ticket in a Tier-II or Tier-III town, you went to a local travel agent, gave him your requirement and he'd say return tomorrow and I will give you the options. Today, the travel agent can go on the Via system, give you the options on the spot and book immediately. Via created this system enabling real-time ticketing access. It did this while offering travel agents better commissions than airlines. The company went straight to the travel agents, promising connectivity and capability and asked for Rs 2.5 lakh rolling deposit against which they could issue tickets. Via signed up 200 travel agents, who funded the business. This is what I call a pay in advance model. Last year, the company clocked $500 billion in revenues.

The second model is the subscription model. Here, the customer pays a lump sum amount upfront and the services get delivered in the subsequent months. TutorVista, now sold to Pearson, is an example of this model. The company figured out that American students needed help with their maths and science homework. There were plenty of teachers in India who could help those student via the internet. The company asked parents to subscribe to the services for $100 per month. The renewal rates for the services were better than 50 per cent, signalling that customers were staying.

Then there is the third model, the services to product model. The example here is that of CE Info Systems. The company was selling mapping software to Indian companies. Coca-Cola had failed in its first attempt to India. It re-entered the market in 1995 with the buy-out of Thums Up. Along with the purchase came a fat book giving details of the bottlers' territories, described in words. Verbal descriptions were obviously meaningless for Coca-Cola executives sitting in North America. They needed maps. CE Info Systems started building digital mapping solutions for Coca-Cola that could overlay demographic data. CE Info Systems did another similar mapping contract for Essar Group's telecom joint venture later on, creating maps for setting up of cellular towers. Eventually it decided to use this digital mapping capability and created mapmyIndia, completing the company's service to product model.

Then there is the flash sales model. Here, a customer sees an advertisement for a product on sale in the newspaper and places an order. She pays upfront. The business, however, places the order for the product only on conclusion of the entire sale with the supplier. The business has got the payment from the customer even before having the stocks in hand technically, using the customer's money to fund the operations. The concept was first introduced by Vente-Privee, a French e-commerce website selling Parisian fashion.