April 10, 2017

Customer-funded development — overview

This is the first post of a short series about what I think is an underused business model among software entrepreneurs, namely sponsored (i.e. customer-funded) development. Key points include:

The second post in the series discusses the substantial complexities that an actual sponsored-development deal might entail.

Suppose you have a great idea for a software product that you want to develop and sell. How do you get initial funding? In some cases the answer is straightforward.

Even better, the product might be fast and cheap enough to bring to market that even a non-wealthy person might be able to self-fund. Examples include:

If you’re in such a situation yourself, congratulations — you’re in a great situation for successful entrepreneurship.

Suppose however that you’re an inventive engineer, with:

With that kind of profile, you probably can raise ~$200,000 or so of some kind of seed/angel funding. But let’s suppose that that’s not nearly enough.

Some of your options are:

Each of these strategies has low probability of working out well.

Another option is government research funding, but that only works in some industry segments (commonly ones with national defense applications) in some countries, and even then only for people who know or figure out how to navigate the grant process.

What’s left is customer-funded development — find somebody in the private sector who wants the product so badly they’ll pay for it before you’ve proven you can deliver. Yes, it’s a difficult sales task — but the business skills you do have probably include the ability to do one or both of:

Getting a major project sponsored by a firm you’re an outsider of will likely be the hardest such persuasion of your life … but you just might be able to pull it off.

In general, a custom development project should be something very important that the customer can’t easily pull off themselves. That’s the sweet spot for getting something funded and for the customer taking the risk of an outside development team. So how do we match that pattern with an unproven invention idea?

That last bit is essential — because from the customer’s perspective, it’s likely that your shiny new idea will fail. Fortunately, many organizations understand that difficult software projects have large chances of failure. In particular:

So how does a hopeful start-up get such a crucial sponsorship deal? As an overview, I’d say:

And finally, as I explain in a companion post, deal structure needs to be handled with great care.

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