Thoughts on startups by investors that
fund them & entrepreneurs that run them

The Cost Equation for a Startup is Better Than Ever

I come from a high-tech software background, and only a few years ago, it would cost at least a million dollars ($1M) for a team of professionals to produce any commercial software product. Now, with open source software components, and low-cost development tools, the same job can be done by one good hacker for a few thousand dollars.

Even for low-tech startups, the scope of information available on the Internet, and its global reach, has had a similar financial impact on the many other challenges facing every startup founder. Here are a few examples:

  • Facilities and staff. Founders now routinely use their home to operate their startup until they are well into the revenue phase. No office space rental, no secretary, and no accountant are required. That’s a burn rate of at least $10K per month that can be eliminated if you are handy with computers and Quickbooks.
  • Technology costs. We all know how much costs have come down on computer hardware, computer software, printers, PDAs, high-speed internet access, servers, and security measures. Skip the IT consultants and build an entry website yourself to save $50K. Do basic Search Engine Optimization (SEO) and Marketing (SEM), like cohort analysis, yourself.
  • Sales and marketing costs. Print your own collateral and marketing materials until the business is rolling. Use the Internet and social networking instead of public relations companies and advertising agencies. Try Web-Ex, free teleconferencing, and Skype instead of international travel for client meetings. Savings can be huge in these areas.
  • Manufacturing cost and lead times. Remember when you had to build a $1M factory to roll-out a new product? Now you can get a product built in China almost overnight with minimal up-front cost, with delayed payment based on first-customer order commitments. With the struggling economy, manufacturers everywhere are negotiating great deals.
  • Wages and benefits. Obviously, if you can do most of the work yourself, you need fewer employees, meaning less for payroll tax, benefits, and workers compensation. As a rule of thumb, you should double every employee’s salary in estimating employee costs, so less is more.

I recognize that different small businesses will have different types of startup costs. For example, a furniture retailer might need a storefront and staff, while you might run an online retail business, at home in your shorts, with no facility or staff at all. That wasn’t even possible a few years ago.

As a result, being an entrepreneur in now within the financial reach of almost everyone. No need to make the assumption that you will need a rich uncle or an angel investor for every idea you come up with. See my interview a couple of years ago with parallel entrepreneur Rich Christiansen, who has started 28 businesses with a target bootstrap investment of $5K each.

Best of all, it’s even considered “ultra-cool” these days to be a lean startup. Of course, a word of caution is also in order here. It makes no sense to rush headlong into a commitment as big as starting a new company without doing your homework on viability first. See specific guidance on “How to Give Your Startup Idea The Sniff Test.”

In summary, I see a historic shift taking place in the world today. More than ever, people are venturing out on their own and starting their own businesses. New cost equations brought about by the Internet and social networking are causing a revolution, and a new age — the age of the entrepreneur — is dawning. Don’t be the last to get on board.

Written by Martin Zwilling

user Martin Zwilling Founder and CEO,
Startup Professionals

Martin is a veteran startup mentor, executive, blogger, author, tech professional, and angel investor. He is the Founder and CEO of Startup Professionals, a company that provides products and services to startup founders and small business owners.

prev next

You might also be interested in

Co-founder Equity Split: A New Framework to Objectively Divide Startup Ownership and Get Back to Building a Business

We’ve just released our free Co-founder Equity Split tool. It’ll give you a fair and objective recommendation about how to divide your startup’s ownership, so you and your co-founders will have a sensible, real starting point for this notoriously hard, crucially important conversation.

Many startup founders find themselves lacking clarity and direction when it comes time to divide their

Read more >

Gust Launches Comprehensive Equity Management Platform for Cap Table Management and 409A Valuations

Gust announces acquisitions of Sharewave and Preferred Return; creates the most robust and affordable equity management solution for early-stage startups.

June 22, 2016 – NEW YORK, NY –  Gust, the global service provider powering the entrepreneurial ecosystem, announced today the launch of a comprehensive equity management platform, Gust Equity Management. The new platform provides early-stage companies with powerful

Read more >

From Accelerators to Venture Capital: What is best for your startup?

With startup growth up 61% since 2014 and more investment programs emerging, it can be overwhelming for founders to know just where to jump in. As the most startup-friendly accelerator on the planet, MassChallenge has helped 835 startup companies around the world, who have raised over $1.1 billion in funding and created over 6,500 jobs. We have seen startups at

Read more >

Valuation Part I: Peeling the Onion, or How Top Investors Value the Startups They Invest In

Update 2017: To help you understand how your startup will look to investors according to this methodology, we’ve created a fundraising feedback tool that will give you investor-level insight into your startup’s performance. In just about 15 minutes, it will tell you how much money your startup is likely to raise, where you can find that capital, and what to

Read more >

Starting a Startup as CTO / Head of Product

After less than a year, Glassbreakers is now a team of 10, we have thousands of active users on our free product, we’ve expanded into enterprises with paying customers and raised over a million in seed funding. After a few of my Glassbreaker matches inquired, I started to reflect on what it’s like to build a startup

Read more >

Comments

One thought on “The Cost Equation for a Startup is Better Than Ever”

  1. Jay Clarke says:

    The market is certainly shifting, the costs for entrepreneurship and technology in general are at an incredible low. With the lean startup mentality gaining more and more traction in the market place, and what looks like a time to learn some solid lessons from the public reaction to the Facebook IPO, the time to be an entrepreneur is certainly now, but do you think the funding market may be retracting instead of growing with the entrepreneurs?