Customer Funding is More Than Money
Ryan Frederick | August 4th, 2021
Investor funding is great, but it isn’t nearly as good as customer funding. Internal funding is also great, but that too doesn’t hold a candle to customer funding. If you really want the pressure to execute and deliver a product, then there is no funding better than customer funding.
Customer funding leads to better products and faster product development because of the unique pressure and expectations they can exert on a product team. This pressure can’t be replicated with any other kind of product funding.
Product teams will say they are craftspeople and professionals, and they will argue that the way the product gets funded doesn’t change their approach to the product or their work. Assuming it’s a customer funded product and much of the product team has some level of visibility to the customer - then I totally disagree.
I have been a part of creating products wherein a customer funded the entirety of the Version 1 product. This was not a small effort or product. The customer’s investment approached close to a million dollars by the time Version 1 was released. The way our team executed on the product was not lost on me. We never missed a milestone, and we did constant product reviews with the customer throughout the process. We built the product side by side with them. They were the subject matter experts, and we were the product experts. But bringing subject matter experts and product experts together doesn’t always equal product success. In this case it did, but I am convinced that it did only because the customer was invested from every perspective. Our team felt a massive obligation to not let the customer down, in part because the customer backed their belief with in us with more than talk or even a letter of intent. They wrote a damn check.
I’ve had the chance to witness other similar circumstances over time. A customer, which can even be the federal government, writes a check or provides a grant for a company to create a product. The grant dollars become available to the company as the product hits certain milestones. No milestone, no check. Investors will sometimes do this with funding tranches. The tranches with investors don’t have the same impact as milestones with a customer has. It is psychological. An investor’s belief in a product and the team behind it doesn’t mean as much as a customer’s belief. Customer belief trumps all others which means their money associated to a product has more impact than any other kind of funding.
Corporations are likely less astute at being great product companies because their product teams and work is funded internally through a budget. Do corporate product teams really care about executing efficiently and effectively for a budget line item? Nah. Most corporate product teams don’t even interface with customers when creating a product, so not only does the funding not come from a high-value, respected entity, but they don’t even have the entity at the table at all. Too many corporate product teams know the budgetary decision for a product is either totally random because it was what someone guessed at and put into the budget as a placeholder, or worse yet, it was what was left after some executive financial wrangling. Corporate product and project budgets are not going to bring out the best in a product team. The corporate budget funding mechanism just keeps people from not wanting to lose their job by a product/project being over-budget (which by the way, they almost always are).
When a product team takes funding from a customer to create a product, something more than the money for the product work is being exchanged. Trust, credibility, and belief are being exchanged as well. The customer is saying through their funding that they believe in, trust, and are betting that the product team can deliver on the promise of a new way of doing things with the product in play. It is these non-financial aspects of customer funding that make customer funding the best funding for a new product.