In our previous article, we wrote about startup prototyping and comparing it with MVP. But this is a more detailed question. To create a best-selling startup, you not only need an idea but the money to implement it. Here, we will look at how much money is needed to launch a startup, what to factor into your budget, and how to work out your costs.
Before you launch your brand new business, you will need to work out how much money you will need to operate your startup successfully. This will increase the odds of your startup not only succeeding but making a healthy profit.
Sounds complicated? Don’t worry; it’s not as tricky as it sounds!
How much money is needed to launch a startup?
Unfortunately, there doesn’t seem to be a definitive answer to this question – the numbers vary wherever you go!
Shopify argues that businesses with more than one member of staff on the payroll spend $60,000 in their first year. But startups that consist of one person spend $18,000.
If these numbers make you break into a cold sweat, there’s no need to panic. You don’t need this money upfront. It is likely to be the case that any money you make in your first year is reinvested into your startup.
Even though we can’t specify how much money you need to launch your startup. There are a few factors at play when it comes to how much capital is required.
- The type of business. Some business niches may be more expensive than others. For example, retail and eCommerce startup ideas are likely to require more capital as stock is needed.
- Your target audience. Some demographics may be harder to reach than others. For example, if you want to target older people, you may have to utilise offline marketing, which is generally more expensive than digital marketing.
- Your skillset. You will need to look at your strengths and weaknesses when launching your new business. For example, if you want to create a mobile app and don’t have coding skills, you will need to hire someone to build an app for you.
- Your location. The country or region you live in can have an impact on how much you have to spend. It may be that you can get grants or tax relief if you live or work in a particular area.
What are some examples of startup costs?
We already described startup stages from a user perspective here. But in this post, we would like to share few examples of business startup costs that we frequently see here at You Are Launched. Bear in mind that not all costs may apply to your specific startup.
- Research. You may need to conduct research to see if your business idea is a viable one. Although you can carry out your own research for free. Some companies can do the research for you if you do not have the time or connections in your industry.
- Legal fees. Depending on the country you are based in or the industry you are starting in, you may need to acquire a licence or get incorporated. If you don’t do this, you may not be able to operate, or you may get fined.
- Website. 71% of small businesses have a website in 2021 – this means that a site is no longer something that is ‘nice to have’… it’s essential! You will need to pay for hosting and a domain, as well as someone to develop it if you don’t have the time or skillset to do this yourself. Costs will depend on the complexity of the website you need. For example, an eCommerce site will cost more than a basic text-only website. But to save even more, we prepared a list of low budget services here.
- Equipment. Whether a new laptop for building your website, or mobile phones for your new sales team, you will need equipment to help move your business forward. If you are looking to save a little money, second-hand equipment is a good option.
- Staff. If you aren’t planning on being a one-man-or-woman band, then you will need to hire a team of people. This can be an expensive cost to your business. But it can be worth it if you are hiring people who have skills that you don’t have. As well as a salary, you will need to factor in pensions, holidays and recruitment costs.
- Business space. If you choose to rent or buy commercial space, then you will need to factor this into your costs. This cost will vary depending on how large the space is and where it is located – space in busy cities will cost more than space in quieter areas. You will also need to factor in utility bills, furniture and business rates for your brand new location.
- Professional services. Rather than hire staff, you may choose to use third parties. For example, rather than hiring a legal or HR department, it may be more cost-effective to use a solicitor or recruiter as and when you need them.
- Insurance. It may be tempting to forego insurance to save money, but it can protect your business if things go wrong, as well as yourself if you are unable to work. The type of insurance you need will depend on the kind of service your startup provides.
Marketing & Scaling Stage
- Stock. If you are starting a retail business, whether online or brick-and-mortar, you will need products to sell, as well as space to store them. The type and volume of stock you buy will depend on your business. You can save money by shopping around, making the most of credit from suppliers or considering dropshipping.
- Marketing. Marketing is essential to promote your startup and encourage customers to buy your product or sign up for your service. Some channels like social media and word of mouth are free and highly effective. However, you may choose to use pay per click advertising or banner advertising instead. Alternatively, if you do not have the time or resources to do your own marketing, you may elect to hire an agency to do it for you. It’s generally recommended that new startups spend 12% to 20% of their gross revenue on marketing in their first year for maximum impact.
Where do startups get the money they need to launch?
Different startups get the capital they need to grow and evolve in a range of different ways.
According to the Kauffman Foundation, about 65% of all startups are financed by loans or personal savings. Just over one in ten startup businesses are funded by either angel investors or venture capitalists.
The best way to determine which type of funding is right for your new business is to work out how much your startup costs will be. You can then decide whether or not you can bootstrap the business yourself, or if you will need a little extra help from an outside investor.
Some of the largest global businesses around today, such as Facebook, Apple, Microsoft, and Coca Cola started off by funding themselves!
How to calculate startup costs
If you need a little extra help to work out how much money you need to launch a startup, there are some great resources to support you.
A good starting point is to use a cost calculator to work out rough costings. Small Biz Trends has a startup cost calculator that you can use to work out what expenses you need to take into consideration when launching your startup, from insurance to rent.
The great thing about using a calculator is that it considers everything that you need to start a business. So you don’t need to worry about agreeing to your budget and then missing something important out!
You will create a more refined calculation when you work on your business plan. Your business plan will show what resources you need and how much money you intend to spend on them, as well as how you will recoup costs.
Here are our top tips for working out startup costs:
- Do your research – don’t be afraid to get as many quotes from potential suppliers as possible. We recommend getting at least three for each item you want to buy!
- Ask fellow entrepreneurs in your network for advice. They will be able to advise how much they paid for certain things when they started out.
- Think about where you can minimise costs when you start. For example, do you really need office space right away? Working from home or using a co-working space at the beginning of your startup journey can help you save money. If you need legal advice but don’t have the capital earmarked, can you trade services with another business?
Is it better to overestimate or underestimate costs?
It’s always best to overestimate costs where you can and have a contingency in place.
According to Geniac, two out of three small business owners are hit with unexpected costs during their first year, which can have an impact on the revenue they earn.
Not only can unexpected costs appear when you least expect them, but inflation can also result in you having to spend money that you did not account for.
One in three startups claim shipping was an unexpected cost for them, as they forgot to factor in shipping and packaging fees, as well as damaged and returned items.
Don’t forget to identify how you will monetise your launched startup
As well as thinking about how much your startup will cost to launch, you need to think about how you will earn money.
When you identify your budget, think about your monetization model – or how you will make money from your startup.
There are lots of different ways your startup can earn money, from subscription models to selling advertising.
In conclusion – building a startup doesn’t have to be expensive
You don’t necessarily need a lot of money to launch a startup that can hit the big time.
Here are two of our favorite stories about entrepreneurs that created well-known businesses, on a tight budget.
Tough Mudder was started by Will Dean and Guy Livingstone, two British men living in America. Fed up with the intense competition that triathlons brought out in people, the pair started the Tough Mudder brand with $7,000 in savings. As they didn’t have much money, to begin with, they pre-sold registration to races, and grew the brand through word of mouth and Facebook advertising,
As a result of this hard work. Dean and Livingstone transformed Tough Mudder into a business that now turns over an incredible $100 million a year.
Spanx was created by American entrepreneur Sara Blakely. Although she started the iconic shapewear brand with $5,000 to her name, she is now one of the youngest self-made female billionaires in the world.
Sara carried out a lot of the work to promote and manufacture the brand herself. She researched patent law to write her own patent, drove to hosiery mills to get them to manufacture her product, and sold Spanx on the QVC shopping network in the early morning.
The hard work paid off, as Spanx is now worth an amazing $540 million.
Need a little extra help with your startup launching?
You Are Launched has been working alongside lean startups, accelerators, and venture capital companies since 2014.
Our team of specialists has the expertise and experience needed to get your startup up and running. So, if you’re unsure how much your budget needs to be or what to focus your expenses on, we can go through this with you step-by-step.
So, if you don’t know how to find an investor, check this article out.
Launch your business with confidence – get in touch with us to see how we can help your startup grow to the next level.