Startups Costs More Than You Think

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I’ve spoken to countless people who are shocked when I tell them it should cost at least $25k-$30k to start just about any serious venture, even when bootstrapping.  I’m invariably told by the person I have this conversation with that they are confident they could do it for a lot less.  And then there was Mark Schuster’s recent post showing that the cost of starting a business has fallen precipitously and that it now costs as little as $5,000 to start a business.   So how could it be?  Am I just completely wrong?  Of course not!

There are two things happening here. First, no one ever counts their own time as being worth anything.  And second, product people always discount how much time/cost goes into marketing, and marketing and bizdev people always discount how much time/cost goes into product development.

Regarding the time issue, economists describe opportunity costs as the amount of potential revenue that one gives up for the opportunity to invest in something else. Or put another way, how much money would you have been making, had you been consulting all of those hours that you spent working on your own startup?  It is work time after all and you’d have to pay anyone else an hourly rate to do the same work.  So isn’t your time also worth something?  Perhaps it doesn’t feel so much like work though because it is on your own terms.  Fine, what about affiliate marketing then instead of that complex software program you’re building? A little time spent on PPC arbitrage and you’d be making some money there.  Again, money made on your own time and terms that you don’t have because you pursued something else.

So then what is the true cost of a startup?  Obviously the answers can vary dramatically depending on what you’re looking to do, but I penciled out the costs of starting three different types of business, SaaS, eCommerce, and Consulting – and I found they can all be done for $5-10k capital (if you’re very crafty), but will require an average of 3-4 months of unpaid time to get off the ground. I’d argue this extreme avoidance of capital usage is not the most efficient time/capital balance but I’ll save that for another time.  For now, let me give a few examples of how much time is required to illustrate my point:

1. Consulting – This seems like the simplest and easiest to get started.  Indeed if you already have a great professional network that is true, and you’re off to the races.  If not, you’ll be spending a few months networking your ass off, responding to RFPs, inbound marketing, and attending conferences and trade shows. The capital cost is minimal until you start hiring and begin requiring office space, but the entire first year or two of a consultancy’s life should probably be networking intensive.  Expect 2-3 months of this however until you start to see consistent clients coming in.

2. eCommerce  – Online retail seems like the next simplest.  If you’re smart you can minimize costs by keeping inventory low and doing fulfillment out of your garage.  But what if you don’t know exactly what to sell?  Well, expect to spend a solid month or two pouring through keyword data, testing products on PPC and eBay, and finding what really works.  Of course you can skip that exercise if you already have direction, which similar to the consulting network helps a lot.  But you’ll still need to lay a foundation.  How will you source your product and from who?  What are the shipping and tariffs and how will you make all that work? These questions take time to research. Next, what advertising channels work and which don’t?  Countless hours A/B testing landing pages and spending on PPC before they become consistently viable.  Aside from your time, expect to lose a few thousand dollars here and there on ads that don’t work until it is all dialed in.  Again, this is probably a 2-3 month process which will require full time effort, in addition to inventory costs, and the cost of ad testing that didn’t pan out.

3. SaaS Product.  This i admittedly my favorite.  Creating your own product is the most fun and the most lucrative, but also the most expensive.  First you’ll need a domain name and hosting and who’s going to do the graphic design for you?  Next, you’ll need to spend time designing the system and probably should bring in someone with domain knowledge to make sure you’re considering their workflows properly.  Do you compensate them?  So far not too bad, but then someone is going to need to code it.  Is it you?  Most likely anything of substance will require then next 8-10 weeks to get to that first iteration completed (the minimally viable product). But usually the MVP is only good enough for crude market tests and beta testers.  You’ll probably go through another iteration of 8-10 weeks in which you do intensive marketing testing and feature refinements before you’re ready to even make a dime!  So now we’re at 4.5 months of time and $5k of capital.  If you put proper value on that much time you’ll probably looking at $40-50k.

So there we go, that’s how I arrive at my numbers. It will realistically cost you $30-5ok all-in, once all time and capital costs are fully accounted for.  You are now at a point where you’re starting to make money off of your investment. Perhaps if you already have a head start with an active professional network (consulting), insight into the right products and marketing (insider knowledge from working for a competing eretailer?), or a code framework from other projects, you’ll have a head-start and can side-step some of this cost.  But then you must consider that time was spent developing those things.  And it is good to leverage assets you already have to reduce waste, but be honest about the true costs by accounting for these things properly.

In closing, I think it is important to look at true cost of entrepreneurial ventures in order to properly weigh those opportunities against the opportunities we give up along the way.Perhaps some projects would not be started if we truly appreciated the actual cost before beginning.  Or perhaps there are better opportunities that we wouldn’t so readily give up, after putting things into correct perspective.