How to Start a Business with Other People’s Money
John Warrillow’s article at StartupNation.com relates the experience of Michael Dell of Dell and Ross Slater of Highspot on their negative cash flow after their startups. To solve their business financing problem, they required their customers to pay upfront upon placing their product orders. By reversing the typical cash cycle, Dell was able to use his customers’ money to fuel his company’s growth and required less borrowing to grow the business.
Your startup will need a lot of cash if you’re paying for stuff before you sell it. If you begin to grow fast, this negative cash flow cycle can cause a catastrophe.
It almost did for technology giant Dell back in the ’90s. Dell used to inventory parts and pay suppliers for the gear it kept on hand to make computers when customers called. The company ran short of cash and almost choked on its own growth.
Galvanized by the near-death experience, Michael Dell himself set out to remake his company’s cash flow by charging customers before buying the bits and bobs needed to build the computers they ordered. By reversing the typical cash cycle, he was able to use his customers’ money to fuel his growth, which meant he required very little external money to grow the business.
Highspot is a small, Toronto-based startup that charges up-front for everything it does. Co-founder Ross Slater explains the company’s payment policy: “In the beginning, the cash flow helped us get started without a lot of financing. Now we see prepayment as a mutual commitment to the success of the relationship we’re creating with our clients. By paying up-front, the client commits to participating in the process, and we commit to providing value and delivering on the trust they have placed in us.”
Wonder how he gets away with it?
Slater explains, “We have a clear, staged process that outlines how we operate and what a client receives. The fees for each stage are right on our website, which filters out the tire-kickers. We invoice immediately, then do what we say we’re going to do. We insist that this is the way we do business. We’ll walk away from a situation where a potential client won’t agree.”
Create a policy for your startup whereby you charge up-front, and your company will be worth more—and a whole lot more fun to run.
Photo by romesART
