I'm an advisor to a startup that is developing a product for a specific industrial use, with a limited customer base (think of a machine for a companies in a niche industry). The capital costs required to develop the product so that it can be available for customers to try out is high, and even developing a "basic" version that can be shown to customers is expensive- above $1MM.
Thus this startup is taking a huge gamble: while plenty of prospective customers want to see the product when it's ready, it can't get customers unless it spends a lot of money to develop its product, but then if the customers don't like the product when they see it, then all of the company's money will have been wasted, and the company will have to close.
As the customers, by our reckoning, will be able to cut certain costs by around 80% due to the product, the payoff from the product will be very high to the customers.
I think that the potential customers should be willing to pay for product development costs, but I'm not sure how to get them to do it.
Has anyone had success in getting customers to pay for product development? If so, are there specific ways or deal structures that were used? Did customers just loan your company money or invest in it like a venture capital fund or angel investor would do, or was there another way of doing such a deal?
Building a product costs lots of money. What doesn't cost a lot of money is spending a week or so on building very high fidelity creative mock-ups of an application. Think through a couple major pains that a portion of your application would solve. Something that is obtainable in say - 2 months of development time. Not the entire product.
Do all of the creative for than and put together a pitch presentation.
Next, get meetings with your prospects. Since it's a small field you should be able to find them easily and get meeting setup. Review what you are working on building and discuss that this is the first module and it will be done in 2 months.
It will cost them $X and they will have the option to buy add on X, Y and Z which are each scheduled to release 3 months apart from each other. At this time really talk about the initial feature and it's immediate benefits and that future features will be coming. It's often not realistic to launch EVERYTHING you want in a first release anyways. So, keep to something simple yet still very beneficial and then the extra features / benefits will come down the road.
Customer will be able to test you out on a lower risk buy, something a little cheaper that they can get in the next couple months. Then once you have proven yourself they will be willing to buy the additional add ons.
Or depending on the effort go in and show them click through features of the entire vaporware app. If you can prove the value/benefit they will be willing to write you a check or enter into a contract to pay you upon delivery.
I have seen some amazing Keynote click throughs that look like someone is using a live application.
Don't be so quick to dismiss Ryan's advice... the psychology behind (successfully) convincing someone to invest in an unfinished software app is pretty much the same for a physical piece of manufacturing equipment. The more that you can illustrate that the concept is just this close to being reality--through manufacturing specs or process diagrams or even computer models--the more successful you will be at convincing someone to take a risk with their million+ for you.
The way that I have seen this pulled off before is to shop the concept to prospective clients. You will be looking for a partner, so expect to be providing some sort of ownership, or additional compensation, to the company/client that funds development.
The pitch goes down one of two routes, based on your answer to the question: "do you have enough money to develop this yourself?" From there you either have the money (and don't want to risk it) or you don't.
If you do have the money, and don't want to risk it on this particular machine, then you will sink your entire pitch here. There's no good way to convince someone to spend their money when you/your company isn't willing to shoulder some of the risk too.
If you don't have the money, recognize that you're asking the company to take a significant risk developing the product when you don't actually have any of the products built, and you never have. Ever. So you're asking them to fund R&D through you... which is risky, and is through an outside company. As I mentioned before... build the case that says "we're this close, all we need is your money to _ ".
There's no way that anybody with the budget to fund a $1M+ development/prototyping project won't also have the business savvy to want a piece of the pie... The payoffs you've already mentioned in terms of cost savings won't be enough to make them pull out the checkbook, especially when you feel like there's a market to develop this and sell it to others.
So your options are to either (a) ask them for a loan, or (b) give them rights to a share of revenues from the product.