Financing tech startups: Cash from prototypes, cash advances or consulting

Potential customers may be willing to purchase an early prototype or provide an advance for a business to build a product or service in which they see significant potential for their own business operation. This type of financing usually takes the form of a commercial business agreement, but may contain special provisions to provide equity ownership in the business or define an exclusive period of time during which the customer can use the product or service before your business sells to their competitors.

Other financing: Consulting services to potential customers

In certain types of businesses, such as software development, entrepreneurs can consider providing consulting services or support activities in the industry as a way to bring in cash for their business while the team continues to develop their own core product or service. In addition to early revenues, consulting and support activities may offer valuable insights into the technology problems that customers face and how they purchase and implement solutions.
Government agencies and companies frequently employ consultants as expert resources to advise them in emerging technology areas such as clean-tech. In life sciences, many providers of diagnostic testing equipment offer a fee-for-service model by partnering with an organization that purchases an early version of the equipment and then provides a service for lower-volume end-users, who may not have the budget or desire to purchase the equipment right away. In many cases, this model can lead to greater sales, as once the end-user has purchased a significant amount of tests, they may decide to buy the equipment for themselves.
Other areas where early customer revenues or advances may happen include businesses that develop applications for a product or platform. For example, consider BlackBerry, or Apple and the iPhone®—cases where the wireless service providers have been willing to work with young companies in order to create applications to increase the usability of their product and thus generate additional service revenues.

Considerations for pursuing cash from customers:

• Does your product or service lend itself to this model?
• Will the terms of an early customer agreement influence your product development activity in a way that may limit the product’s appeal to a wider group of customers?
• Will the presence of a large customer as a partner or investor limit your ability to sell the product to that customer’s competitors?
• Will providing per diem support services delay the delivery of your core product or service to market?
• Will your provision of consulting services create a conflict of interest for your customer when deciding whether or not to purchase your product or service?

Sources of early cash or financing:

• Customers willing to take early risks on a product that is central to their business operation.
• Customers who hire consulting or contractual support in areas where your team can fill these needs.

Pursuing early cash (or cash advances) from customers through consulting services or selling a prototype of your technology might provide a great way to finance the development of your idea. You need to determine whether or not your idea lends itself well to this model. Once you’ve identified some potential customers, prepare to sell your idea or expertise and to introduce yourself.

References

Canadian Bankers’ Association. Retrieved April 9, 2009, from http://www.cba.ca/lang.php.
Canada Business Services for Entrepreneurs. Retrieved April 7, 2009, from www.canadabusiness.ca.