Crowdfunding via customers is the new startup capital

When the JOBS Act was signed in April, the startup community gave itself a collective high five. Crowdfunding would enable startups to reach out to the whole world to get access to funding, not just a small cabal of investors living in a 20-mile radius of Menlo Park.

But hidden in the headlines was a much more powerful underlying trend. With the JOBS Act came the creation of an entirely new class of capital that could be far more valuable to startups: customer capital.

Meet the new investor class: Customers.

Instead of raising capital from VCs to build a product, entrepreneurs can skip the line and reach out to customers before the product is actually produced. It’s called a pre-order, but it has a twist. In this case, the pre-order is for a product that doesn’t actually exist yet.

We’ve all dealt with pre-orders before, whether it’s the new iPad or a blockbuster summer movie. But this time customers fund the idea of a product, with the hope that the object itself will someday follow. For example, the Pebble Watch raised $ 10 million on Kickstarter by crowdfunding from customers strictly through pre-orders. This is just the start.

A big, juicy new fund.

While there is a big, amount of capital available from VCs, angel investors and private equity folks, the amount of capital available for entrepreneurs when you count the customer market is much larger. And the audience is far more diverse.

The customer capital pool is not limited to the commitments of LPs or how much cash a newly-minted angel investor just netted from the Facebook IPO. It’s only limited by the quality of the ideas and the absorption rate of early adopters in all segments.

More importantly, the pledge of capital is available to startups before they build their product, which allows them to do important market testing before they spend a dollar of real money. Granted, crowdfunding isn’t the end-all, be-all of proving a market, but it sure beats the old model of “if you build it, they might come.”

A new twist on an old model.

Funding through customer capital is nothing new. Savvy entrepreneurs have been pre-selling customers for years in an effort to bootstrap businesses to profitability. It’s just that they were doing it out of necessity, not because it was the most efficient way to access capital — and certainly not because it was fun.

Bootstrapping was what you did to get your minimal product out to the market quickly. It was your cost of finding out whether anyone would ever commit to buying your product. But it took a lot of time and cost to simply ask your market, “Will you buy this?”

Context is king.

Instead of hitting up friends and family, ask a crowd.

Crowdfunding platforms have made it easier to access this funding, but it also has given entrepreneurs the context to ask this question at scale. Prior to having a crowdfunding platform, you could certainly build a website to ask your friends and fans to back your idea. But it would feel like a one-off attempt.

Platforms that aggregate crowdfunding backers provide a big pool of customer capital providing entrepreneurs with customers who are particularly willing and able to accept the risk that an idea may not come to fruition. The platform already presumes risk, and for an entrepreneur presenting an idea, that is an invaluable piece of context when asking for money.

The ability to query your potential customer base at scale prior to building anything addresses a lot of painful problems. First, you learn whether there is really anyone that wants your product. Your friends can tell you it’s the greatest idea and VCs can tell you it’s a horrible idea, but the only true indicator is a customer order. Second, you avoid wasting a year of your life building a product you thought someone might want, only to find out that you were incredibly off base.

Of course, a crowdfunded project can’t predict every market.Mark Zuckerberg could have presented Facebook and may have not found a single backer. It happens. Crowdfunding is just one indicator, but at least it’s feedback from real customers – not theoretical feedback from pundits.

The important point is that you can get feedback now, before you start spending lots of cycles, improving upon your idea in real time. Anyone that’s ever built a landing page to test a new concept on the Web (and failed miserably) knows exactly how valuable it is to test first and build the product later.

A true game changer.

Between providing early access to capital, testing new ideas in real time and potentially growing the entire pool of startup capital astronomically, the emergence of crowdfunding customer capital is about to change the startup game in a big way.

As of now the market is incredibly nascent. Funding a watch for $ 10 million sounds novel and grabs headlines. Ideally that kind of traction will be old news in the next few years as more companies are crowdfunded and the records for what they raise continue to jump.

In the meantime, the world just got a whole new startup fund. Let’s go do something amazing with it.

Wil Schroter is the co-founder and CEO of Fundable.com, a crowdfunding platform for startup companies.

Oliver Twist image provided by Corbis/Guy Ferrandis/Tristar Pictures.

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