The age-old startup story is all too familiar at this point. Founder works job for Company X. Founder recognizes problem that can be solved (often via technology). Founder decides to start company to build said technology.
What we don’t talk much about, however, is the cost of starting up. Knowing what expenses to anticipate is essential to properly planning your finances and setting a foundation for startup success. For many founders, understanding these costs can also be a defining factor in when they choose to leave their current job to focus full-time on their new venture.
The truth is that every startup requires different resources and capital to reach its full potential. In some cases, the biggest costs are measured in time and attention. Imagine a startup founded by individuals that don’t need a paycheck and are capable of doing the work themselves. In other cases, the startup won’t even take a single step forward without money in the bank to pay founder salaries or pay for engineers, cloud computing costs, etc.
As such, the answer to “how much does a startup cost?” most often is answered with “it depends.” Your needs and ambitions are likely different from every other startup just as their needs and ambitions are different from yours.
This post aims to break down these costs and provide some guidance on managing your startup budget. Even more, this post will surface some potential hidden costs that should be considered as you embark on your startup.
Factors Influencing Startup Costs
Several factors can influence the cost of starting a business. These factors include (but obviously aren’t limited to):
The industry in which you're launching your startup can significantly impact the initial costs. For example, opening a brick-and-mortar store might require a substantial initial investment compared to a software-as-a-service (SaaS) business. Digital products in highly regulated industries will require certifications that likely aren’t required in other industries. And efforts focused on creating new hardware are going to warrant heavy R&D expenditures out of the gate.
Whether you're selling products or services, your costs for production, delivery, and storage will vary — sometimes even within the same sector. For example, an e-commerce venture that requires large stocks of inventory is going to require storage space, equipment for sorting/managing inventory, etc. On the other hand, a small e-commerce business focused on a limited set of products (like our side gig which we talk about here) can be easily run out of a garage.
In the spirit of our core principle: crawl, walk, run — we encourage entrepreneurs to start small and grow opportunistically. Our side gig started with digital-only products that required zero inventory storage, office space, etc. We then grew that to include physical goods over time, once we had clarity on market interest and production options.
Legal and Administrative Expenses
Registering your business, obtaining necessary licenses or permits, and possible legal consultation fees should be factored into your startup costs. These costs range from minimal if you’re planning to (and have the knowledge to) register your business entity and file the appropriate paperwork without help.
If you need a little help navigating the legal and tax planning aspects of creating your business, then you might turn to a solution like Legalzoom which can help establish your business for a fee. Beware, there’s always an upsell moment with these services. In our experience, getting an entity set up from beginning to end (including filings, registered agent services, etc.) using Legalzoom will cost upwards of $1,000.
If there’s something unique about your business or the way you’re structuring your legal entity that requires input from an attorney, your costs will increase measurably. If you have an attorney draft and file the necessary paperwork like your LLC Agreement, you should anticipate a minimum cost of a few thousand dollars.
The cost of living and doing business in your chosen location will affect your expenses, particularly if you need physical office space.
Initial Inventory or Services Setup
If you're selling physical products, you'll need to account for initial inventory costs. For service-based businesses, you'll need to consider any specialized equipment or setup costs. Some new businesses use crowdfunding platforms like Kickstarter to measure interest and capture funds from customers up-front to off-set the first inventory run or setup costs. Be aware, however, that enough new companies have accepted money but ultimately never produced products making some customers wary of this investment structure.
Technology and Software Needs
From building a website to using various software for operations, sales, marketing, and communication, technology costs can add up.
Marketing and Branding Efforts
Creating a brand identity and promoting your business to reach your target audience will require a budget.
Breakdown of Common Startup Costs
While costs can vary greatly depending on the factors mentioned above, here are some common startup costs that you might encounter:
Office Space or Work-from-Home Setup
Depending on your business, you may need to rent office space, or you may need to set up a comfortable and efficient home office.
Equipment and Supplies
These can include computers, office furniture, production machinery, or any other equipment necessary for your operations.
If you're selling physical products, you'll need to invest in your initial inventory or find a dropship partner.
Website and E-commerce Platform
Building a professional website and setting up an e-commerce platform (if applicable) are essential in today's digital age.
Legal and Licensing Fees
Costs associated with business registration, licenses, permits, and potential legal consultation should be included in your startup costs.
Marketing and Advertising
Whether it's digital marketing, traditional advertising, or both, promoting your startup will require a budget.
Staffing and Payroll
If you plan to hire employees or contractors, you'll need to account for their salaries or fees.
Depending on your industry, you may need various types of insurance.
Utilities and Office Expenses
These can include electricity, internet, office supplies, and any other regular expenses associated with maintaining your office space.
Importance of a Financial Cushion
In addition to these startup costs, it's wise to have a financial cushion to cover unexpected expenses or slower-than-anticipated sales. Experts often recommend having enough capital to cover six months to two years of operating expenses, depending on the nature of your business.
Realistically, however, it can be hard to have ANY cushion if you are bootstrapping your business on your own. If that is the case, then you should work to build a cushion to cover core costs as quickly as you can. For example, you can probably go a couple weeks (or months) without a salary if you get creative. But if your digital product uses AWS or Azure then that bill absolutely has to be paid….else you’ll be out of business.
If you have the ability to build a cushion, take care to do so with essential core costs in mind.
How to Reduce Startup Costs
Our team at Apollo 21 has worked with dozens of startups that, by their own admission, feel just a few dollars away from stabilizing. If that applies to you then you should know that, fortunately, there are strategies you can employ to reduce your startup costs:
Lean Startup Method
This approach emphasizes creating a minimum viable product (MVP) to test market demand and iterating based on feedback, helping to minimize upfront investment.
Outsourcing and Contract Work
Rather than hiring full-time staff for every role, consider outsourcing certain tasks or roles to contractors or agencies. This can help you control costs while gaining access to expert talent. In fact, Apollo 21 pairs nicely with new startups looking to launch without hiring an expensive team of full-time employees.
Utilizing Free or Low-Cost Software Tools
There are numerous free or low-cost software tools available that can help manage various aspects of your business, from project management to marketing automation. Look at open-source software or existing software APIs to see what code and features already exist. Doing so can save a considerable amount of money in the long run.
Co-working & Co-warehousing Spaces
If your startup requires a physical location but isn't ready for a full-fledged office, co-working spaces can be a cost-effective solution. These spaces offer flexible plans and shared resources, which can significantly lower costs.
Similarly, if you need storage for inventory but aren’t ready to commit to your own space, look into co-warehousing solutions. Much like a co-working office, these flexible storage spaces offer fractional warehousing options to store and manage your inventory. Often, co-warehousing spaces will also include offerings like co-working offices, 3PL services, and more.
Bootstrapping versus External Funding
Funding your startup through personal savings, or bootstrapping, can be a good way to control costs and maintain equity in your business. However, external funding can provide a significant financial boost—however, it often involves giving up a degree of control and ownership.
Understanding and managing startup costs is a critical step in building a successful business. By carefully considering these costs and exploring strategies to manage them effectively, you can set your startup on a path towards financial stability and success.
At Apollo 21 (www.apollo21.io), we understand the challenges and opportunities that come with launching a startup. Our experienced team can help guide you through the process, providing expert advice and support to help you navigate startup costs and other critical aspects of starting a business. Remember, the journey of entrepreneurship is a marathon, not a sprint. With proper planning, resourcefulness, and resilience, you can turn your startup dream into a thriving reality.
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