Encouraging Customers to Fund Your Innovative Ideas
When you’re operating a self-funded business, finding the necessary funds to invest in new product development can be a challenge. Most of your resources are allocated towards selling existing products and services, leaving little room for financing new ideas. While you could stick to your current product lineup, doing so puts you at risk of being overtaken by competitors with better offerings. Another option is to create unique offerings for customers who request customized solutions, but this approach may lack scalability as you develop bespoke solutions for each opportunity.
Alternatively, you can propose developing a custom product for a specific client while retaining the rights to the intellectual property (IP) associated with its development. A classic example of this approach is exemplified by Microsoft’s co-founder, Bill Gates. Legend has it that Gates negotiated a deal with IBM, receiving $430,000 to develop the DOS programming language, while retaining ownership of the code and subsequently selling it under the MS-DOS brand.
A more recent success story involves Brian Ferrilla, who adopted a similar strategy when he founded Resort Advantage. His company aimed to assist casinos in complying with new anti-money laundering laws, as criminals were exploiting casinos for money laundering. Ferrilla initially sold a basic version of his software to smaller casinos but received a significant opportunity when MGM, a major player in the casino industry, approached him. MGM required extensive customizations to Ferrilla’s product, and instead of building a solution that MGM would own, Ferrilla offered to waive the customization charges in exchange for retaining ownership of the product.
Ferrilla recognized that if MGM valued specific levels of security and features, other operators in the gaming industry would likely appreciate them as well. MGM obtained its tailor-made solution, while Ferrilla retained the rights to a product that the entire gaming industry would find valuable. This decision proved fruitful when Ferrilla’s business, with only 15 employees and generating $3 million, was acquired for over $10 million. If Ferrilla had fallen into the trap of developing custom software for each customer, his business would have likely been worth less than half that amount. Custom software development shops that provide unique solutions for individual customers often trade at around one times annual revenue.
The next time a customer requests a bespoke solution, consider agreeing to it on the condition that you retain ownership of the IP behind your work. This approach can enable you to leverage customer funding to develop innovative products while maintaining the value and potential for future growth in your business.