Getting your exciting start-up business fully funded by venture capitalists may be the Holy Grail for some entrepreneurs but not everyone agrees.

John Mullins, Associate Professor of Management Practice in Marketing and Entrepreneurship at London Business School and a veteran of three business ventures – one that was stock exchange listed – thinks too much cash, accessed too early, can turn entrepreneurs "stupid".

Mullins thinks a better way to fund a business is to get customers to do it – not by crowdfunding – but by getting orders in the bank and healthy cashflow on the strength of your business proposition. Hundreds of businesses have done it in various ways and he has found five models (see panel).

"When I set out on my research I knew that there were customers who had some really good working capital models. Get the customers' money early and pay the suppliers as late as you can is the common strand. The surprise was that there are five different ways. I searched and searched in the hope of finding a sixth model but I couldn't find one," he tells The Irish Times.

Raising venture capital is time consuming, puts monkeys on your back and doesn’t take account of the fact that “Plan A” for a business rarely survives intact, he argues.

“Very few businesses start off with a perfect plan. You have to pivot. If you have ‘Plan A’ funded from angels you have to flawlessly implement the plan. The plan probably won’t work but it is difficult to go back to them and admit that because that will undermine their confidence in you so the inclination is to plough on wasting time and money.”

A better approach is to go to the target market and, if necessary, adapt your plan for what customers really want. You then find ways of getting them to pay you upfront.

“You need to be very careful when you have very little money and it makes you sharper.”

Mullins, who has recently published a book The Customer Funded Business, says that there is compelling evidence that the odds of success for VC-backed ventures are far worse than entrepreneurs suspect.

He points to a comprehensive long-terms study of US venture fund returns by Josh Lerner that analysed Thomson Reuters VentureXpert data. It found that more than half of all funds deliver no better than single-digit returns, while many lose some or all of their investors' money.

Mullins is not a big fan of crowdfunding, however.

“I think it is a disaster waiting to happen from a public policy point of view. There are a lot of grannies who are going to get burned and at some point there is going to be a backlash with people saying ‘wait a minute, didn’t we used to have rules that protected people from this time of investment’?”

It’s also a potential nightmare for entrepreneurs, he feels. “Think about it. You have 50 investors who really care about your business, sending you emails and calling you and you’ll spend a lot of time keeping them happy – time you should be spending on developing your business.”

Not spending time chasing venture capital at the outset doesn’t mean you won’t need it later. The history of the more successful customer-funded business is one of raising serious capital in the market – but only when they have proved themselves.

As Mullins put it: “There’s a time and place for VC and that’s after you have customer traction that proves that you are on to something. It’s a question of timing.”

Pay-in-advance models work well where there are “pockets of truly compelling customer pain”, as Mullins puts it. The more pressing the customers’ pain, for either goods or services, the more likely they will pay you in advance even for a solution not fully developed.

Indian entrepreneur Vinay Gupta’s company Via is a perfect example. It addressed the problem of how to issue real-time tickets in a country where credit card penetration was low. In exchange for a rolling $5,000 deposit he provided mom and pop travel agents with a computer and access to IATA certified real-time availability and ticketing capability – with better commissions. Within weeks he had signed 180 travel agents and was booking 200 tickets a day, with almost $1 million cash from the deposits. Eventually Thomas Cook took a stake in this successful business.

Service-to-product models include Microsoft which transformed itself from a service business developing operating systems for other PC makers to a producer of software-in-a-box.

Dell is a perfect case study of the pay-in-advance model, many magazine and newspaper publishers have well-established subscription upfront payment models, while fashion business Vente Privee has excelled at the scarcity model. Mullins feels that more businesses, especially service-based ones, should think about these models.

Accommodation site Airbnb and dog-sitting service DogVacay are good examples of another one of these models, matchmakers which take small slices from making appropriate introductions. They are entirely web-based business and don't have inventory.

The better known of these, Airbnb, banks travellers’ money when they book their trips – often many months in advance – and pays out only after the traveller has arrived, holding on to its commission.

But isn’t one flaw in this model that once a connection has been made, the intermediary is not so important and fees can be avoided if the service provider and client deal directly next time out?

"You go once to Vietnam, then next time to Thailand, ect, so perhaps there isn't a huge worry if you have a big volume of clients like Airbnb. In the case of a dog service, where you are looking for repeat business, that would be more of a concern," Mullins accepts. High five customer funded models 1 Matchmaker models (Airbnb and DogVacay) 2 Pay-in-advance models (Dell and Threadless) 3 Subscription models (Netflix and Financial Times) 4 Scarcity models (Zara and Vente Privee) 5 Service-to-product models (Microsoft and GoViral)