Early stage fundraising: the place of the customer
Throughout all ages, humanity has always attempted to foretell or understand the future. We dream and imagine, we build predictive algorithms, we have prophets and soothsayers. We even hope for time travel. It is that time of the year when every think tank in town publishes an outlook for the new year. After all, having a reasonable feel of the future provides opportunities as well as risks that could shape the outlook of any individual, business or economy.
What needs no prediction, however, is the central place that a great customer proposition will do to the prospects of a business. Businesses that do not adequately immerse themselves in their consumer needs, learn customer behaviour, and consequently find ways of meeting them consistently do not need any forecast to predict their eventual collapse.
It also happens to be an unheralded way of fundraising to support scaling up.
Let me explain.
- Customers generate direct revenue, which can allow some free cashflows for growth subject to having adequate margins.
- A good customer relationship strategy results in repeat sales and referrals, which results in growth.
- Investors are more inclined to fund a business that demonstrates a sustainable revenue model, boosting their ability to attract finance.
- The impact of any business is directly related to the number of customers reached. This builds the business brand and points to its ability to make future sales.
Why are customers the most consistent source of growth funding?
Investors back business with return expectations. Returns can only be achieved if a company is making money or on a path to making money. Businesses make money through customers- underscoring the need for building systems for customer acquisition and retention.
While raising capital is extremely important in any scale up plan, it is lengthy and time consuming. For SMEs that are often bootstrapping and with limited human capital, this is very critical. Between developing financial models, investment pitches, due diligence and negotiations with potential investors, significant human and/or time resources are required. Therefore, revenue streams will be the most consistent source of cashflow in between and during fundraising cycles.
This emphasized further by issues such as the interest rate capping in Kenya that has seen banks allocating more assets to risk free government papers- constraining credit growth to 4% in 2018 from highs of 20% in 2015. Translation? Kenyan banks are not in any particular hurry to fund projects that they consider high risk. SMEs are the very definition of high risk. Less money headed to SMEs means they have to find alternative sources of capital.
A great customer value proposition can enable a business to grow organically to complement other capital raising initiatives.
Where does that leave the clean tech entrepreneur, especially at the early stage phase?
Being an early stage entrepreneur can be daunting. You have to juggle every management function on a lean team, and in most cases, a restricted budget. The competition is ferocious, and you are not immune to the rapidly changing workings of the macro environment.
What can work for you at this stage is your ability to be flexible, respond quickly to dynamic conditions and create close relationships with your target market. Being nimble is an effective weapon in finding pockets of value in the economy. The bulk of this nimble strategy is on being customer centric.
Looking for a reliable forecast this year? Listen to your customers.
By: Curtis Musembi