- Talk to people
- Think hard about a particular topic
- Come up with something that strikes me as a real breakthrough thought
- Realize 15 minutes later that it is totally obvious and that a certain group of people have already been doing it this way for years
- Write it down anyway in case there are other people as dense as I was 16 minutes ago who could be helped by me writing it down. Try to make it funny.
This is going to be one of those.
Customers are more valuable than investors. You are more valuable to an early stage venture as a customer than you are as an investor.
I was out for drinks last week with a friend of mine who works for a large environmental conservation nonprofit. We have talked for over a year off and on about his organization starting a program to invest in some of the huge explosion of agricultural data companies (drones, sensors, data platforms) whose products could be turned toward measuring and managing environmental outcomes. It’s an interesting proposition if I do say so myself, and something still may come of it. But as we talked about each of these companies, especially in what is today a very frothy venture investment market, it quickly became apparent that there is an easier way to support and influence these companies: buy and use their products. At this stage of their development, any one of them are willing to spend a lot of time with a customer who is willing to pay for their beta product and give them feedback. The fact that much of this feedback will be tailored to help them build products that better meet the need of a conservation buyer is gravy. And, unlike an investment program which would require hiring new staff and building out new capabilities, this organization already has staff who understand the technologies and can make informed purchase and deployment decisions.
So that is the high flying start-up ecosystem, but what about everyone else? I wrote a few months back about how venture capital is not useful for 99% of social ventures and regular businesses. This is a major stumbling block for most social investors (including governments and corporations) when they realize that most or all of the companies they want to support have no ability or intention to create an exit for equity investors. But if you talk to these companies, most of them will tell you they don’t really need investment, they need good customers (and by good I mean long term relationships that create good margin without inordinate hassle) If they really do need investment, the right set of customers make getting a bank loan relatively easy.
I know this is probably obvious to most, and maybe it’s a result of the little corner of the universe I inhabit. I talk to corporations, foundations and NGOs all the time about setting up strategic investment programs, but we rarely talk about setting up strategic purchasing programs. This seems like one area where government is ahead of the rest of us, although they usually insist on calling it “procurement” which sounds vaguely like proctological procedure . I am very proud to say that my home city of Portland, Oregon, is about to launch an Early Adopter Program (powered by Switchboard) that encourages city departments to contract with local start-ups. It is notable that they decided to do this instead of launching another seed-investment program. Their (correct) view of the local scene was that these start-ups need their first large customer much more than they need another seed fund.
So, NGOs, corporations, foundations and governments should consider strategic purchasing as a complement to (or instead of) strategic investing for some simple reasons:
- You already have the expertise on board
- You can work with a much broader set of companies
- You already have budget approved
- You have no long term ownership or creditor relationship to manage
- You can involve a much broader set of people in your organization (yes, I realize this is a double edged sword
Finally, and I am going to get high falootin’ here:
- Engaging with companies or social ventures in a customer/vendor relationship creates a relationship that is inherently fairer than creditor/debtor or donor/recipient relationships.
Each party is giving and receiving something of value, and, managed correctly, you have a chance to avoid some of the power dynamics that plague philanthropy and impact investing where one party has all of the resources and power, and the other flatters the powerful to get access to those resources.
OK, so that’s the big institution perspective. What’s in it for the little guy? Plenty.
- Validation - The most important thing a large customer brings to an early venture is credibility - credibility to other potential customers, credibility to business partners, credibility with regulators, and credibility to investors should investment be needed. Customers beget investment much more often than vice versa.
- Feedback - Along with validation comes feedback that improves the product. If this feedback comes from a customer who is explicitly focused on accentuating the social or environmental impact of your product, so much the better.
- Flexible, Non-dilutive Capital - Earned revenue is the best investment there is because it’s yours. You don’t have to give away part of your company, you can use it to grow your business however you see fit, and you don’t have to exit the business in 5 years to pay your investor back.
- And back to my high falootin’ point: Receiving payment for product or services from a customer ensures the focus and dignity of the company, which is often an area of concern for entrepreneurs when talking to foundations or impact investors.
I think most people get this intuitively. Part of the explanation for many on crowdfunding platforms moving toward pre-purchase arrangements has to be artists and entrepreneurs saying, “Look, I don’t want or need a donation, I just want to know that you guys will buy this thing if I make it.”
Obviously, there are some complications to consider. Working with small companies requires some extra engagement and there’s risk that things will show up late or not as initially imagined. From the company perspective, large clients with an explicit social or environmental mission may take some extra work to make happy, but these seem like surmountable issues and I am glad that cities like Portland and start ups like Switchboard are taking the lead. I don’t think any of the points above diminish the importance of impact investing, but I do hope that some of the PR glow we currently enjoy could slide over to the world of procurement Step one: come up with a better word than procurement.