While limited resources should never stop entrepreneurs from executing on their ideas, budgeting and ... [+]
CB Insights finds that limited business resources is the second biggest reason why startups fail. Running out of cash is in my opinion the most painful reason of startup failure. Even though today’s inexpensive tools and open source technologies made it easier than ever to start and grow a startup, cash is still an indispensable business success ingredient.
Premature growth and borrowing beyond capacity are two red flags for early-stage self-funded startups. While limited resources should never stop entrepreneurs from executing on their ideas, budgeting and smart resource allocation are key to long-term startup success.
Here is a quick breakdown of early-stage startup expenses from idea to a functional product.
1. Product Development
The biggest investment in a technology startup goes into app development and design. If you have a technical co-founder or a programming background, instead of cash, the investment will represent time spent building the product.
As a non-technical founder, the investment needed to build an app idea will naturally depend on many variables. It can range from a couple of thousand dollars to high six figures for the first version of the product.
The two biggest factors that influence product development costs are complexity of the app and rates of the hires. Out of these two factors, for a solution in high demand, while an application with only the needed features might slightly negatively affect startup performance because people want more than just “simple,” hiring the person or team with the lowest rates and least experience will significantly hinder startup performance over the short and long-term.
Therefore, with a small budget, find ways to minimize costs by reducing project scope and dividing product development into milestones with several small releases to go to market faster and build the next versions with higher certainty based on customer insights.
Because product development is the costliest early-stage startup investment, making bad investment decisions can quickly lead to startup failure due to lack of resources. A good strategy is to hire a startup or technical advisor who can help you hire the right people to build the right product.
One of the best ways to quickly release a product for testing the riskiest assumptions without necessarily building an application is by using no-code tools and templates. There are many products that can help you create a quick functional MVP for less than $50 per month, although, expect to rebuild the product from scratch when ready for the next phases.
2. Marketing
Nowadays, more startups rely on paid marketing acquisition channels like social media and search engine advertising for growth. This can be seen in the significant increase in the median seed and Series A investment rounds in the last few years when matched with revenue data from social media and search engine sites.
Depending on the business model, paid advertisement can be a wise acquisition channel especially for startups with a clear customer acquisition cost, customer lifetime value and churn rate. When the numbers add up, paying X dollars for every new customer is the right way to go.
Having said that, figuring out those key metrics requires testing and data. As such, while startups with a proven business model can benefit significantly from paid channels, early stage ventures must first validate the problem, solution and market. Therefore, first, budget for a test period which for email marketing, paid ads, outreach, sponsorship and other channels can range from a few hundred to a few thousand dollars depending on the business model, product cost, market and competition.
Technology startups are businesses like any other business. Even though software customers can pay for and use the product online, no one will bother looking for you if you don’t show up. Find out who your ideal buyers are and hustle to meet and offer them the solution. Chances are you don’t need a marketing budget to get the first paying customers.
3. Legal
Entrepreneurs are filled with ideas. Some are not feasible, others are just fun to generate, a few are viable and one or two of those ideas are what the founder eventually decides to pursue. If we incorporated every idea we ever had, we would probably have a portfolio of hundreds of companies.
Preferably as early as possible, incorporate your company to protect yourself and the business while facilitating any investment, partnership and sales opportunities. The cost of incorporating a startup is a few hundred dollars depending on the location and legal structure.
While there are many platforms that offer a guided self-service company registration process, it is important to first consult with a lawyer to make sure you’re doing the right thing. Platforms like LawTrades and UpCounsel can connect you with the right lawyer for advisement or legal support.
4. Domain And Hosting
The cost of your website domain name is independent of your startup’s business model, pricing and revenue. There are many multi-million dollar startups that purchased a domain for the typical twelve to fifteen-dollar range. However, if you are looking for a premium domain, the cost can be significant. It’s up to you and your budget.
Hosting and cloud storage costs for an early stage startup usually will not exceed $100 per month. The bigger the company, the higher the bill.
5. Other Expenses
This is the category that most entrepreneurs don’t sufficiently account for. In most cases, no matter the research you do, the first version of your product needs minor, major or a complete change. If you only budget for the first version, chances are you will exhaust all of your investment before building a solution your customers like, need and pay for.
In my opinion, a budget for other or miscellaneous expenses in a startup should not only account for accounting, legal, transaction, travel, memberships and other fees but also, the cost of making the wrong decisions with hiring, product development and marketing. Always reserve at least twenty percent of your total investment to cover such costs.
A proven way to minimize these costs and increase the odds of startup success is by working with a mentor. Research shows that mentored startups grow significantly faster, raise more funds, generate more revenue and stay in business for longer.
