London Connection Q&A: Professor John Mullins
In collaboration with the University of London International Programmes and online education partner Coursera, London Business School is launching its third MOOC, ‘How to Finance and Grow Your Startup – Without VC’. The course instructor is John Mullins, Associate Professor of Management Practice in Marketing and Entrepreneurship at London Business School (pictured below left).
An award-winning teacher and scholar and one of the world’s foremost thought leaders in entrepreneurship, Professor Mullins brings to his teaching and research 20 years of executive experience in high-growth retailing firms, including two ventures he founded and one he took public.
Since becoming an entrepreneurship professor in 1992 he has published five books – including the definitive book on assessing entrepreneurial opportunities, The New Business Road Test – dozens of cases and more than 50 articles in a variety of outlets, including Harvard Business Review, the MIT Sloan Management Review, and The Wall Street Journal.
His research has won national and international awards from the Marketing Science Institute, the American Marketing Association, and the Richard D. Irwin Foundation. He is a frequent and sought-after speaker and educator for audiences in entrepreneurship and venture capital.
Professor Mullins talks to London Connection about solving customers’ problems, funding early stage companies, and how Airbnb came to get its name.
Why do so many entrepreneurs think that raising seed or early stage capital from a venture capitalist is the Holy Grail?
I think this notion of a VC or business angel as a first port of call for an entrepreneur starting a business has come to pass largely because of the incredible history we've seen over the last couple of generations of the ecosystem that does that. We've seen fabulous companies created that way – Google, Facebook, Apple and more – and they make great role models. We've seen incredible returns generated for investors who have invested in those kinds of companies. So the media has jumped all over these stories – and they're terrific stories. As a result, everybody says well, gee, wouldn't I like to be the next Mark Zuckerberg or Steve Jobs. I think that's why it's happened. But the facts are that the vast majority of fast growing companies anywhere in the world – the Fast Track 100 in the UK, or the Inc. 5000 in the US – if you look at those lists and you study the companies and ask did they raise venture capital, the answer is, the vast majority of them did not. So then the question becomes, is there another way?
You mentioned the media. In terms of popular culture, does a TV programme such as Dragon's Den promote the wrong entrepreneurial approach?
I wouldn't argue that it's the wrong entrepreneurial approach. Some of the companies that have been created this way wouldn't have the success they've had without the substantial amount of venture capital that's been poured into them. Think of Airbnb and Uber recently. I think the role models that we have today, such as Richard Branson in the UK, and Bill Gates, Mark Zuckerberg and Michael Dell in the US, and television programmes like Dragons' Den in the UK or Shark Tank in the US and similar programmes in other parts of the world, I think they've played a pretty constructive role in making entrepreneurship a viable and potentially attractive career path for smart, motivated and capable young people. So in many ways that's all been good. I think one of the downsides of that is that everybody says, well, I want to do it that way. And not all businesses are venture capital backable, they aren't suitable for venture capital in most cases.
"Michael Dell started Dell computers with a pay-in-advance model. Bill Gates and Paul Allen started Microsoft as a service business and only later flipped it to become a product business."
Who should take this MOOC?
It's of interest to anybody who's in the early stages of starting a business. That might be somebody with an idea for a new venture, or it might be somebody who's got a new venture just getting underway, is beginning to get some traction, and now wants to grow it. So there's a range of entrepreneurs for whom this is appropriate. But it doesn't matter what industry they're in, what country they're in, whether they're an artist trying to build a very small business or a technology entrepreneur hoping to shoot for the moon. The best way to finance their business is with their customers’ funds, and this course provides the toolkit to make it happen.
The MOOC will enable participants to apply one of five customer-funded models to a business or business idea of their own choosing. Do these models represent a new concept?
No. In my book The Customer-Funded Business I argue that this is nothing new. Michael Dell started Dell computers with a pay-in-advance model. Bill Gates and Paul Allen started Microsoft as a service business and only later flipped it to become a product business after they realised that writing one operating system after another for the early PC manufacturers resulted in a series of service deliveries that all looked pretty much the same. They said, well, if they all look alike, why don't we just create a product – we'll call it MS-DOS – that could be downloaded with all the PCs or sold in a shrink wrapped box. So there's nothing new in these models, it's just that they haven't been studied or talked about before.
The MOOC offers a very useful toolkit in terms of getting your own startup off the ground. Could you touch upon one of the practical ideas that you explore?
One of the most fundamental ideas here is that what you want to do is get your customers’ money as early as you possibly can, and you want to pay your suppliers as late as you possibly can. And if you're able to do those two things in tandem, you end up having cash, let's call it float. You have cash in the bank and you can use that cash to grow your business before you have to take some of it and pay your suppliers. That's what Dell did, and that's what Gates and Allen did, too. It's simply a matter of finding a big enough problem to solve for a potential set of customers that is so compelling that those customers will pay you in advance to solve their problem, even though you may not have fully developed your product yet. That's a key takeaway.
Are there any examples of struggling companies that have been able to successfully switch their model to create a stronger company?
Yes, it happens frequently. In the MOOC I do an interview with Rud Browne. Browne is from Bellingham, WA, and was the founder and CEO of a company called Ryzex. Ryzex was in the business of selling handheld computing devices, like the gadgets that the FedEx driver carries to scan parcels. Those products come in technology cycles and the products go along with a software system that gathers and reads the data, reports it, and so on. And because of the cycles in that industry, those devices get old – and then there's a new and better system. Browne built a wonderful business selling refurbished handheld computing devices to people who, for example, maybe had a supermarket chain and they were opening some more stores and they needed some more devices, but maybe the cycle had taken its next step and the old devices weren't available any more.
Over time, this business was very cash positive and profitable. But when the financial crisis hit in 2008, Browne knew the first thing that companies would cut in a downturn is capital equipment expenditure. That really hit his sales, and hit his margins even harder, so he had to transform some more things in his business. By doing so he got his hands on his customers’ cash even faster and went from having a $2m overdraft to a $6m surplus in a matter of 17 months, in the teeth of the crisis. A remarkable story.
"GoViral went from a bootstrapped start in 2003 to a sale of the business in 2011 for nearly $100m, without putting any investment capital into the business."
Will the MOOC include examples of entrepreneurship from different parts of the world?
Yes, exactly. We'll talk about businesses in all parts of the world. These include a wonderful Danish business, GoViral, that went from a bootstrapped start in 2003 to a sale of the business in 2011 for nearly $100m, without putting any investment capital into the business. It was built entirely with customers' funds. I'll be talking to a professor from Santiago, Chile, who will be talking about the ecosystem in Latin America and what it looks like there. We'll be talking to an angel investor in India about what the ecosystem looks like there, and of course North America and other likely spots. So this MOOC is intended for a truly global audience and will have examples from all over the world.
Do you think there’s an element of luck involved when setting up your own business?
I think many entrepreneurs would argue that luck does play a role in the success that they have, but luck comes to those who are well prepared and who are alert and eager to stay in touch with good things that are happening around them. You can call that luck or you can call that preparedness and hard work.
"What I argue in the MOOC is that taking venture capital – money from an angel or a VC – for equity in the business, is generally not appropriate in the early, pre-revenue stages of the business."
Are you saying that taking venture capital is bad?
I don't argue that venture capital is fundamentally bad. In fact, I'm an active angel investor and I have both raised venture capital and I'm a limited partner in a venture capital fund, so I provide venture capital, too. What I argue in the MOOC is that taking venture capital – money from an angel or a VC – for equity in the business, is generally not appropriate in the early, pre-revenue stages of the business. It's much wiser to wait until you have customer traction before you raise capital. So Airbnb, for example, got its very first funding from some convention goers who slept on air mattresses and ate breakfast at the homes of the two founders in San Francisco – that's the genesis of the name Airbnb. That early funding came from customers. At some point, when they had enough traction – which began to happen at the US Democratic National Convention in 2008 – then they realised that they had something that was really pretty interesting. And then they said well maybe it makes sense to raise some capital, and at that point of course the business was proven because they already had customer traction. Needless to say, if you already have customers the risk is much lower, and therefore you raise capital on vastly better terms. There's an appropriate time and place for venture capital, and that time and place is not a pre-revenue startup, in most cases.
Will there be interactive elements within the MOOC?
The MOOC will be highly interactive. In each of the modules I've developed an exercise that I want the participants to do. It might be going out and interviewing a bunch of entrepreneurs or investors in their community, and learning about a particular concept that we've covered in that module. It might be studying some online businesses – matchmakers like Airbnb and eBay, for example – that bring together buyers and sellers. I ask participants to go and study them and see if they can find some patterns regarding which ones are succeeding and which ones are not. So there's a lot of real-world activity – there are no silly multiple choice quizzes – to help them become better entrepreneurs and to put new tools into their entrepreneurial toolkit.
Watch an introductory video about ‘How to Finance and Grow Your Startup – Without VC’