Innovation

The Customer-Backed Approach to Developing New Products

How one PROFIT 500 company used "customer financing" to launch a whole new venture

Written by Alexandra Bosanac

Bluedrop Performance Learning is a market leader in virtual simulation training for Canada’s naval and aerospace industries. But the St. John’s firm also has a newer—and increasingly profitable—division that specializes in job training software for workers in light industry.

Bluedrop built that business by converting clients into backers, through a model CEO Emad Rizkalla calls “customer financing.” Here’s how it works: A company has an idea for a new product or venture, and takes it to its existing base of clients, who agree to purchase the product if it meets their needs. (Payment could come at any point in the product process, from conception to development to delivery).

Publicly-traded Bluedrop (CVE: BPL) took the #157 spot on the 2015 PROFIT 500 Ranking of Canada’s Fastest-Growing Companies. So why would a company that already has shareholders and is scaling rapidly take the unconventional step of asking customers to help with the development of new products?

MORE BLUEDROP: Why Firing Your Clients is the First Step to Growth »

Customer financing gave Bluedrop the certainty that it was working on a real problem that needed solving, which allowed the company to develop better products according to Rizkalla. “We tend to see outside capital as a way to look at M&A activity [or] as a way to really grow organically,” he notes. “But in terms of entering verticals? I have the greatest security and the greatest confidence in what we’re doing when a customer’s willing to step up.”

Unlike traditional investors, customer financing doesn’t require an entrepreneur to give up equity. The benefit to the client is that they can get a brand new product that’s basically tailored to their needs, thereby reducing the risk.

Bluedrop stumbled onto this method of raising capital in 2011. At the time, the company was working on a low-cost portal that would allow small business owners and job-seekers to access online training courses. It’s a model that’s shown notable success elsewhere—Lynda.com, one such service, was purchased in spring 2015 by LinkedIn for (US)$1.5 billion.

MORE PLANS: 7 Questions with Emad Rizkalla »

Bluedrop built the platform, but a year into the project, realized that they didn’t have the domain expertise to monetize it. “We are not a business to consumer company,” says Rizkalla. “We’re more enterprise salespeople. We [sell] large deals around software and licensing—like we do on the defence side to systems—to large clients.”

So the company pitched their technology to the Workplace Health, Safety & Compensation Commission of Newfoundland and Labrador (now known as WorkplaceNL). “We think small businesses and unemployed people could really benefit from this. But they’re not going to pay for it, and we don’t know how to make learning viral,” Rizkalla says he told the commission. “But you have an interest in developing small business capabilities so you can increase productivity [and] in helping unemployed people get jobs.”

The provincial agency decided to invest, with Bluedrop working to transform the product into enterprise software that could be sold to other governmental agencies. “Now [the] product is in four provinces, close to a dozen countries. There are 300,000 people using it,” reports Rizkalla. “There’s a whole division [within the company] around it with 45€“50 people.”

Here are Rizkalla’s tips for leveraging your existing customer relationships to fund new ventures.

Don’t just bring your clients a proposal

Even though your clients know your work, you should treat them like investors who you’re meeting for the first time. You need a prototype to show them, says Rizkalla. A working model will convince them that there’s a need for the product and that it’s implementable.

“You have to have a kernel of a product that’s unique and that’s proven to work in another context,” he says. “Then you can show them the potential of taking this new technology and applying it in a whole new vertical.”

Be patient and generous 

During contract negotiations, WorkplaceNL was firm that it wouldn’t invest a cent until it could see that the product was taking form, and that it was turning into something that would be genuinely useful to the agency’s operations. That’s fair, says Rizkalla.

“You should be prepared to take that risk. This isn’t custom development,” he says. “We’re happy to go to clients and just show them what we have [and] how close we are, and [to] ask if they’re willing to take a leap of faith with us to sign these agreements. But frankly, if we can’t deliver, we won’t get paid.”

Don’t be afraid to show your idea to an audience

Some entrepreneurs might be concerned about revealing too much about their potentially game-changing idea. But through his experience of mentoring young entrepreneurs, Rizkalla says he’s learned that “startups that involve their customers early in the process tend to be more successful.”

Product development tends to be more fruitful when it’s done collaboratively. “The goal of any technology business is to be [as] close to the ground in solving your client’s pain as you can be,” Rizkalla says. Revealing their plans helped Bluedrop refine their ideas to better suit customer needs. “I think we have a much better product portfolio than we would’ve otherwise, if it were more ivory-tower product development.”

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Have you used “customer financing” to get a new project off the ground? Share your experiences and product development strategies by commenting below.

Originally appeared on PROFITguide.com