Entrepreneurship Part VI: The Sustainable Alternative

Many entrepreneurs believe there is no choice but to take venture capital. How are they going to build the product otherwise? There are alternatives, however. They may seem longer and harder, but in light of the dangers described previously, they may actually look more attractive.

At our meeting in December, Kanth described how some of the early funding for his company came from consulting engagements. I also recently met an entrepreneur interested in launching a venture starting from a consulting business. The idea is to solve specific customer problems and simultaneously build a core product that is usable by multiple customers.

Software engineers will readily understand this approach. If you write software to solve similar problems, it is usually advisable to “factor out” the similar or identical components. This makes the next problem easier to solve using those components, and improvements to them immediately benefit all solutions.

The consulting approach has a number of benefits:

  • The venture remains in close contact with paying customers
  • The entrepreneur begins to see patterns of similar problems, and the varying contexts in which they must be solved
  • The consulting business itself may become so lucrative that launching a product seems unnecessary
  • The customers become a core set of early adopters for the product if and when it is built
  • The customers may be willing to fund the product development venture, especially if it will solve critical problems
  • Customer references are always helpful in raising venture capital on attractive terms at a later date
  • The existence of multiple customers for a core product proves that there is really a market for it, and helps to characterize that market.

The most important aspect of this approach is to get engaged and stay involved with customers. That is the sustainable approach. Chasing after venture capital distracts you from this involvement. And even if you succeed in raising venture capital, it is not a sustainable source of funding for your company. And the opportunity cost of pursuing it may be deadly.

It was the day after that December meeting that I found out I was being laid off.

Tags: Business

Created at: 20 February 2009 12:02 PM