Schell, a Carnegie Mellon University professor of entertainment technology, landed a six-month, six-figure deal with a Fortune 500 company in the games industry. And, he was savvy enough to convince that first customer to advance some of the deal money to Schell Games, allowing him to hire staff and move into a South Side office.
Schell's story isn't an isolated incident. When banks aren't amenable to lending money for a new business, and venture capitalists or angel investors want too high a percentage of your business in return for money, asking your customers to provide advance payment is another way to collect enough operating capital to get your operations off the ground.
And, while Schell may be a player in the games industry -- he headed up the Walt Disney Imagineering Studio before moving to CMU, and he's well-known in the games industry -- tapping your customers for financing isn't just for All Stars.
But, says serial entrepreneur Jack Roseman, you do need to offer something of significant value
"The real issue is how much do they want you," says Roseman, who also serves as director of the Roseman Institute, a consulting firm that counsels fast-growth businesses.
Roseman recounts the tale two other CMU grads who came up with an accounting software package for car rental companies. A major rental firm wanted the software company to customize it for their particular use. The software company agreed, but insisted on payment up front. The rental company balked at first, not because it couldn't afford it, but because its usual practice was to pay after delivery.
The rental company ultimately relented, Roseman says, because of the software's value to its business.
From the other side of the table, a business considering fronting the money to a vendor because it wants to take advantage of a product or service that the vendor is offering must keep several factors in mind, Roseman says.
Most important, determine whether or not you can trust that vendor. That can be determined to some degree by asking for references from other customers. And, says Roseman, you can mitigate some of the risk by doling out the funds in stages rather than all at once.
"Establish milestones," he says. "And pay as they reach each one."