In the case Rotary Rocket, the company took the contracts, which would be payable when the service was performed (approximately 10 years from signing), and went to Wall Street banks to borrow the money against the contracts (also known as “factoring”) because billion dollar investments are too large for VCs. The banks were concerned that 10 years is a long time, and that the customers could cancel their orders prior to successful completion of the rocket. To address this problem, the CFO purchased contract cancellation, from the only insurer capable for taking those billion dollar risks, Lloyds of London. With the contracts insured, banks were willing to loan the money - but it only happened because it was already clear that customers wanted what would be built.
Now outside of billion dollar rockets with decade long development times, investors may be quite willing to accept orders or Letters of Intent as evidence of traction, and just set a higher ROI and take the risk themselves, rather than requiring cancellation insurance that the Rocket business required.
Yes, Kickstarter is a store. And what you do there is “pre-sell”, which is no different from what the Rocket example did. The advantage of Kickstarter and IndieGoGo and other platforms like that is that they can help you find consumers willing to PRE-pay for idea stage products. But long before either of these, we used to seek out such customers in other ways, often through, word of mouth and event marketing.
My first entrepreneurial business was a service business, graphic design and printing. Since I had not been doing graphic design and printing prior to getting that contract is exactly an example of selling something before you have it! Now, I will admit that it is far easier to sell a finished product than to ask someone to trust you, that you will deliver. However that doesn’t mean that it is impossible. In my case, I focussed on my customer’s problems with their current supplier, I offered them the chance to get each poster they wanted with less effort on their part, with a better appearance, at a slightly lower cost, and I also offered to handle rush orders within 48 hours (which the existing supplier could not accept) - at a higher cost. After the first month, I was getting all of their business, and more than half of it was the more profitable rush orders.
Since that time I have developed other SaaS and HWaaS services for other start-ups, and I regularly get a first customer (often one who becomes a first investor) to advise us during development, and because they become proof of traction that investors can actually talk to.
I will agree that Service startups are not a good fit for equity crowd funding platforms like crowdfunder who are looking for proof of traction. But frankly those sites have not been particularly good for product start-ups without traction either. It isn’t the form that matters, it is that the kind of investors attracted to these platforms are looking for evidence of ROI that is independent of their own interest in what the product or service is.
The way to get pre-paid customers is to go directly to the people who have an existing problem, the people you think will be your customers. 90% of them will decide the problem isn’t that critical and that they can wait until a finished product is out there and vetted by other people. But the remaining customer prospects are the ones who will be first adopters precisely because their back is up against the wall in some way - and most of these are so frustrated by the status quo that they will eagerly put the time and effort in to accelerate getting the solution they need. And among the most motivated are those who will put their money where their mouth is - either through pre-payment like Kickstarter backers, or those “strategic” partner angels who invest because they will also personally benefit.
Of course, if you have the personal funds to create an MVP, if you find the money raising process hard, you might well go ahead and create an MVP instead of seeking customers. That’s especially reasonable if you can afford to try and fail a number of times before finding product-market fit.
Because having a customer at the start de-risks projects for me, and since I seem to be able to do it, I prefer it rather than risking more time and money to discover a product-market fit. I prefer to start with that. But if you find it hard you have to go the way that works for you. It might be higher risk, but you may have no choice than going with your strengths.
For people who find it hard to sell their ideas to customers, I totally understand why they would not want to do spend time pre-selling. I can understand why they would believe that if they can just create something, and then show it (“if you build it, they will come”) sounds seductively easier, and maybe for that person even necessary.
I find that the people who are most successful with pre-selling usually talk about their future products in a very different way from those people who have to build their MVP before they can find customers to back them. Here is the difference I have noticed:
The Pre-sellers actually are not pre-selling a fixed product or service - they are selling an opportunity to someone experiencing a problem (the prospective customer) to have a collaborator (the entrepreneur) who will work together with them to jointly solve the problem. In short, they are selling a development process that will result in a product or service, and not the end result itself. This kind of entrepreneur is very flexible about what the product or service is and acts as a co-equal with the customer on product definition, and that approach appeals to smart people who have problems that are very pressing - and which they are frustrated that they currently are unable to solve on their own. This customer sees that their active involvement is actually making a big difference in assuring that the final result will be PERFECT for their needs, and they will get it far sooner by actively collaborating, rather than waiting for the right product to come on market. At the risk of perpetuating a stereotype, the people who are most likely to communicate with customers in this way usually have a long successful track record of “business development” positions. These people have their ego wrapped in the ability to create through collaboration and partnership.
The Sellers typically have a fixed solution in their mind, and they don’t want to collaborate with customers who might want the product or service to go in a different direction. Since there is little personal benefit to the customer when all they have to do is make a single yes/no decision, rather than a collaborative process that involves them, Sellers usually find that selling ideas before they are built doesn’t create much enthusiasm, as the customer figures they can just wait and make the purchase decision later. Again, at a risk of stereotyping, I will say that it is often the most successful technical performers who are most likely to have the Seller style. These people have their ego wrapped up in finding and delivering solutions that no one else can see.
I have seen some start-ups who begin with only founders with Seller approaches be unable to get customer-investors, so they eventually do need to make an MVP without one. However, occasionally a new founder is added to the team, one who has those collaborative qualities, and suddenly the company finds it easier to get customer-investors.
Anyway, I sense that Nickolay’s comments are coming from “pre-selling strategy is not working for me” and therefore questioning whether it is possible. My answers are coming from “there are examples that show it is possible for some people some of the time”. But that doesn’t necessarily mean it is possible for Nickolay, or anyone else who has more of the Seller, rather than Pre-Seller, personality.
There is no right way, only what’s right for you. Only you know your strengths, and trying to do it someone else’s way may not work. But you don’t need to prove that no one else can do something just to be able to say it isn’t right for you.