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The story. In 2000, IT consultant Angel Pérez returned from the US to his native Puerto Rico, where he took a job running the San Juan office of Rock Solid, a provider of IT support for Microsoft products in Texas. The five-person team served a single customer with a $1m service contract. Mr Perez thought there was potential to grow. But how?
The first challenge and strategy. Because growth would have to be funded by cash flow generated by Rock Solid’s service contracts, Mr Pérez figured that his company’s Microsoft certification and relationships would be the door-openers to help him attract new clients.
By 2006, he had expanded the Puerto Rican operation to 80 people, supporting Microsoft products as well as those of a handful of other software companies.
Fortunately, getting partial payment in advance – for service providers with a good reputation – was the norm in this sector.
The second challenge and strategy. Mr Pérez saw Rock Solid could expand further by modernising the systems of Puerto Rico’s 78 municipalities. Most still used typewriters and manual ledgers.
He persuaded the trading town of Coamo, with just 30,000 inhabitants but with a visionary mayor, to become the first client for a systems overhaul. Mr Pérez offered $2m worth of IT systems development work for a quarter of the price, doing the work for less than his costs. He figured that what his team would develop would easily have applications in other municipalities.
By 2008, Mr Pérez was signing up a new municipality every three months. Word had spread that Rock Solid’s work had enabled the municipalities to make savings, redirect staff and ensure increased transparency in how funds were deployed.
But it was hard to convince prospective municipal customers to switch to PCs because of the need to buy lots of new equipment and hire expert staff. Then the advent of cloud computing provided an opportunity to turn the bespoke services his team were delivering into standardised software that future customers could run from the cloud. Better yet, a simple contract, instead of a long tendering process, was all that would be needed to win the business.
As Mr Pérez had already learnt from his customers which key functions they valued – HR and payroll, collections (from taxes to parking tickets), accounting, and citizen services (from ambulance services to fixing potholes) – he knew exactly what his new cloud-based software should do.
By mid-2010 Rock Solid had its first cloud-based municipal customer, paying a modest monthly fee per PC user. Instead of paying a team of the company’s IT consultants to re-engineer their processes and reporting, municipalities could simply log on to the cloud and run the new Rock Solid software from their desks.
For Rock Solid, the lion’s share of the effort to develop the cloud-based software product had, in effect, been paid for by learning from the services that it had delivered to Coamo and others.
By mid-2012, Rock Solid was continuing to deliver its traditional services work to clients in Puerto Rico, while the cloud-based revenue from new municipal clients was adding 25 per cent to the company’s revenues at attractive gross margins, and with a scalable model.
In both cases, Mr Pérez had, in effect, persuaded clients to help fund the growth of the business. The first can be described as a “pay-in-advance” model, whereby customers paid upfront, thanks to industry norms and Rock Solid’s reputation, while the second could be described as “services-to-product” model.
The lessons. Customer- funded business models matter because raising capital is rarely easy – especially now – whether from venture capital, government schemes or “family, friends and fools”.
Entrepreneurs looking for cash for their next venture would be well served to spend time focusing on what the business can do that customers will pay for in advance, rather than expending lots of energy on raising capital.
The writer is associate professor of management practice in marketing and entrepreneurship at London Business School. He is the author of two best-selling books, ‘The New Business Road Test’ and, with Randy Komisar, ‘Getting to Plan B’.
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