His Customers Bankrolled $10M Equity

A few weeks ago, Jim ran me through his financing / GTM strategy.

I loved it & have to share it.

Most founders see “multi-year customer pilots required,” oligopolistic industry (few players, but big $$$) where big distributors control the universe, and they say No thanks.

Not Jim. He knew this:

Get friendly with your customers, and you could see both investment + a faster path to market.

Jim wanted to break into the livestock feed industry with a unique, patented food additive.

But the playing field looked pretty tough:

• Livestock industry (his customers) → basically a members’ club
• Livestock feed → few big distributors holding tons of power
• To get big distributors to take your product, they’d want years’ worth of field data (roughly $15 million, if you’re keeping it cheap) unless customers demanded it

It’s not just money, it’s ****time**** as well - and even after you spend years, you don’t have certainty you’ll succeed.

A tough scenario to raise venture financing.

But Jim cracked that nut, in a way you wouldn’t really expect.

Here’s how, step by step:

Step 1: Offer your customers a DEAL

First, Jim looked at the market and said, F that.

Tons of forces stacked up against him.

To get venture capital in to fund the years of trials, pilots and more, he’d probably be giving up ~35-40% of the company before even hitting meaningful sales.

But he saw the alternative:

He could cut out the market barriers by going direct to the customers, and giving them a deal.

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So he approached customers with a punchy offer:

Step 2: Prepay in exchange for some equity

In Jim’s case, the deal went something like this…

“You buy our product - which you know is gonna be great - for a fair price, and you’ll get a piece of the company”

Key pieces to this deal:

1. A minimum 1-year commitment to buy (but ideally 3- to 5-years)
2. Prepayment for the first year’s supply
3. In exchange, customer gets a piece of the company

You’d be shocked at how supportive your die-hard customers (or even potential customers, in Jim’s case) can be when they want to see you succeed.

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And it’s because there’s a lot going for you when you’re doing a deal with a customer…

• Odds are, they’ve got some money
• They know your space, and better understand the value of your product than some disinterested financial investor will
• They’re probably networked with other customers
• If your product helps them succeed, then it’s a self-fulfilling prophecy of growth, because they’ll buy more & you’ll…

Step 3: Get pulled into distribution, not pushed

In pretty much every industry, there’s a few companies that control distribution to a greater or lesser extent.

• Grocery: McLane, Core-Mark, SpartanNash, Kehe…
• Liquor: Southern Glazers, RNDC, Brown-Forman…
• SaaS: Big4 Consultants, Oracle, Salesforce

“Pushing” into distribution is far more $$$ than getting pulled in.

When you’re trying push distributors to carry your product, they’re gonna be taking a big cut from you.

But when they keep hearing about more customers choosing to use you / your solution / your product…

You hold the leverage. They come to you.

In one industry I know, “pushing” into distribution means giving up a 25% cut + paying for shelf space ($$$). Getting pulled in means you don’t pay for shelf space, and give up 15% instead.

In either case, when you do a deal w/distributors, your revenue tends to shoot up.

The only question is “what did it cost”

Anyone who invested before helping you get pulled into distribution - their investment is worth a heck of a lot more.

Step 4 (Maybe): Supplement with Venture Capital

So that’s what Jim did:

He worked with his customers, got $10,000,000 worth of orders, multiple years’ commitments, substantial prepayments…

…and most important, crystal-clear product market fit.

So he took his strategy further, and approached investors with this story:

“Customers love it, they’ve signed up to pre-orders, and they’re invested in our success. Wanna come in alongside them?”

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Summary

In the end, Jim didn’t have to give up that 35-40% to get fully financed. It was closer to the low 20s.

Getting customer prepayments in exchange for equity can be wildly powerful - to make it happen you need to really listen to customers and make sure your product is dynamite.

Give customers a great offer, and it can fund some or even all of your equity needs.

That’ll make the VCs listen up, and listen good.