Tapping Your Clients as a Source of Capital

Can talking to your customers help you raise capital? In a word – Absolutely! How so you might ask? The short answer is because your customer(s) represent new or recurring business to you, which of course drives cash flow, that in turn creates the basis of how you earn income – including income to pay investors and banks. But let me be much more specific, particularly as it relates to the startup or early-stage businesses that are trying to raise their initial round of seed or venture dollars. I’ve noticed an interesting and recurring phenomenon as I have been working closely with entrepreneurs on their quest for capital. So often when I ask an entrepreneur to tell me who their top 10 client prospects are, I’m amazed at how few can actually tell me. They most often have a decent sense of who their general customer is going to be in terms of the market they are going after, but typically fall well short of being able to specifically identify targeted clients by name. For those entrepreneurs that are able to specifically name which initial clients they’re targeting, when I follow up with the question of whether or not they’ve actually talked to the client the answer is most often “no”. Now, there are usually a number of very good reasons for this. Often the entrepreneur wants to wait until he or she has “a better story to tell” before they get in front of a potential client, or perhaps the entrepreneur is concerned that the prospective client might actually be interested and want to place an order that the entrepreneur is not yet ready to fill. While both of these are valid concerns, allow me to challenge conventional wisdom for a moment and offer the following points for further consideration:

• Having a reputable client that has expressed an interest (perhaps a Letter of Intent) in potentially purchasing your product/service is an enormous credibility stamp in the eyes of investors.
• Talking to your prospective clients helps you hear “directly from the customer” whether or not they see value in what you’re offering – remember, you may think what you have is great but if no one is interested in buying what you have to offer that’s a problem.
• Securing your first client, especially if positioned appropriately, can serve as one of your most significant strategic partners whereby the client can:
  • Help you validate or “prove out” your new product, service or innovation in the form of a “beta test” or pilot initiative
  • Help you package and market the success of the pilot or beta test to position you to bring on additional client opportunities
  • Help you raise capital if your client/strategic partner can agree to purchase certain quantities from you upon the successful completion of the pilot which creates a “predictable” stream of revenue which is always of interest to banks and investors
  • Help you with working capital by possibly agreeing to be flexible with initial payment terms as you build up cash reserves

The key to establishing these capital producing client relationships is setting and managing expectations. These initial client meetings are not for you to try to sell your products and services TODAY. The idea is to effectively position the clients to purchase from you in the future. If you are perceived as genuinely trying to create solutions for your clients that will help them save money going forward or increase their top line revenues and profitability, the clients will be far more willing to help you help them. 

There is much more to explore here on effectively leveraging client relationships, but I hope this quick blog serves to stimulate some new or revisited approaches on this critical conduit to capital.

Darrin is Chief Economic Inclusion Officer of JumpStart and President of JumpStart Inclusion Advisors. He founded and ran his own strategic planning and management assistance firm and spent 16 years in the commercial banking and finance industry. Darrin has an MBA from Baldwin-Wallace College and an undergraduate degree from Mount Union College. He has led a series of workshops and seminars on matters of economic development and diversity.