Beijing has the world’s costliest
rental housing, according to a survey of 15 global cities, with average prices
more than 1.2 times average salaries, says a report by the Global Cities
Business Alliance, a UK-based not-for-profit organization. The rise in rent, in
developing countries like China, India, and Pakistan, has provided
developers an opportunity to make money out of thin air.
What they do is to purchase a
piece of land and then announce construction of residential plaza or shopping mall over
it. Advance booking is announced for residential and commercial units. The
advance money collected is then used for completing the project. Unheard in
many developed countries, realty development is one of the most lucrative areas
for investors.
The use of customers’ money
for growth isn’t limited to realty sector only; entrepreneurs can use this
method to grow their startups in other areas as well. Take the example of
TutorVista, which successfully leveraged this customers’ money model of
financing. It started when Krishnan Ganesh hired three teachers and provided
them with VoIP internet connection, PC displaying a digital whiteboard along with
webcam. It quickly became a 100$ per month tuition service.
Dell is another example of
customer funded business. Michael Dell, founder of Dell, started by selling
customized PCs to small businesses. The core percept in his business was to collect
cash before having to lay out money on chips and computers to be sold.
Customer funding provides many
benefits to the startups. Usually, startups receive higher valuations if they performed
successfully for an extended period of time, without external funding. Additionally,
strong cash inflows, from customers, allow entrepreneurs to focus on proving
business model rather than wooing investors.
In this model of business
funding, balance sheet shows more current liabilities than current assets. In
accounting term it is called negative working capital. Ironically positive
working capital is assumed to be good as it poses less insolvency risk to the
business.
Not every startup can be run
using customers’ funding. Capital intensive projects need to rely on
traditional way of financing.
No comments:
Post a Comment