How much cash is needed for startup costs? In other words, how much money do you really need for a startup?
Can you afford to start a business of your own? How much do you need to raise or borrow? What’s a reasonable amount to ask investors for?
These are all important questions that aspiring entrepreneurs should be asking themselves.
You certainly don’t want to dive in and quickly run out of money. That can be incredibly discouraging and won’t serve those you want to help at all.
You also don’t want to put off starting a well-timed business if you already have more funds than you really need.
So, how much cash do you need? If you don’t have enough yet, where can you get it?
The Ultimate Guide To Pitch Decks
Here is the content that we will cover in this post. Let’s get started.
- 1. How Much Cash Does It Take To Start A Startup?
- 2. Major Factors Impacting Your Startup Costs
- 3. Who Are Your Customers?
- 4. What Type Of Product Are You Selling?
- 5. Licenses & Regulations
- 6. Sales Cycle & Customer Acquisition Costs
- 7. Types Of Expenses
- 8. Organizational Setup
- 9. Fundraising
- 10. Marketing
- 11. Hiring
- 12. Manufacturing
- 13. Where To Start Raising The Cash For Your Startup
- 14. Friends & Family
- 15. Angel Investors
- 16. Startup Accelerators
- 17. Venture Capitalists
- 18. Self-Funding
- 19. How To Get Started
- 20. Create A Budget & Break It Down
- 21. Create A Winning Pitch Deck
- 22. Recruit Great Advisors
- 23. Raise Your First Round
- 24. Show What You Can Do
- 25. Summary
How Much Cash Does It Take To Start A Startup?
Some startups may cost nothing to begin; others might need to raise $150M to make them viable.
Some of the world’s biggest multi-billion dollar companies were launched with $10,000 or less. Others have raised hundreds of millions from investors before they even built a product.
There are a lot of variables. Let’s look at some of the big ones.
Major Factors Impacting Your Startup Costs
Who Are Your Customers?
Are you targeting individual retail customers with very inexpensive items? Are you targeting enterprise customers for high-ticket items that will have high expectations for security, insurance, and more?
This may influence how much you will need to have in working capital to get through to closing sales, and putting money back in the bank. Although, there are hacks, like making your big customers early investors and partners.
What Type Of Product Are You Selling?
Are you working on a hardware, software, or services startup? This can dictate how much you need to spend to make your product and start selling it.
Clearly, there is a big difference in the hard costs. You may be able to sell your service tomorrow with virtually no upfront costs required. Or consider the minimal cost of creating a new iPhone app versus building a rocket ship that is going into space.
See How I Can Help You With Your Fundraising Efforts
See How I Can Help You With Your Fundraising Efforts
Licenses & Regulations
More highly regulated industries typically have higher startup costs. Some require licenses which can mean having a certain amount of money or backing and insurance. Others have lots of regulatory hurdles, which can require years of clinical trials and applications before getting approved for sale.
Sales Cycle & Customer Acquisition Costs
If it will take staying in business for two years before you can close your first customer versus being able to be making sales on day one, that is a substantial difference in startup costs.
Then there are the actual direct hard costs of marketing to and closing those customers. You may be creative and find channels that cost you nothing. Or you may be paying an average of $400 per lead. Or even thousands by the time you close a sale. Adding up these expenses should give you a fair overview of how much cash is needed for startup costs.
Keep in mind that in fundraising to cover your startup costs, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Types Of Expenses
There are many, many businesses that can be started with just a mobile phone and a wifi connection. A laptop may be a nice bonus. Along with access to clean water and some ramen to keep you going.
Of course, there are many other areas in which you might spend or want to invest to really get things going.
To officially start your company, you may need legal help filing your articles of incorporation, and tax and accounting help. Then there may be insurance, permits, and website domain names to acquire.
You may need a mailbox to use as an address. Though you don’t need an expensive lease for office space, office furniture, or an expensive physical business phone system.
It is going to be important that you know how to differentiate between the must-haves and the splurging on nice-to-haves. As well as what is really going to deliver the best returns on dollars invested.
This is one major expense category that aspiring entrepreneurs frequently overlook and forget to budget for.
There has been a lot of hype about startups getting funded so easily, and the ability to raise money on crowdfunding platforms.
What the media doesn’t publish is how much it costs to raise that money, or how long it took to work towards launching and closing those successful campaigns.
You may need six figures in legal fees to set up some types of campaigns. In other cases, you may need to budget at least 25% of your target raise in marketing and related expenses.
Then you have your regular marketing and advertising expenses. You aren’t going to get any customers or sell any units without getting out there and marketing your business.
Even if you just plan to go out there and knock on doors yourself, you may need promotional materials, a website and professionally written LinkedIn bio, and other collateral.
Some forms of advertising may only cost a few cents or dollars per lead or action, but you may still have to spend thousands each month to run a large enough campaign to get any results.
One of the biggest categories of expense for startups is recruiting and employees. Not only the recruiting expense, but HR, management, salaries, benefits, and accounting.
You may certainly need to grow your team to grow your business. Though you can also greatly minimize this at the beginning. Whether through bringing in cofounders with the skills you need, leveraging advisors, strictly using remote and on-demand workers, and offering equity and stock options in lieu of some pay.
This is the actual cost of building your product. And that’s how you estimate how much cash is needed for startup costs.
Where To Start Raising The Cash For Your Startup
These are some of the channels which entrepreneurs and early-stage startups look to first for the cash they need for their startup costs.
Friends & Family
This is the first stop for finding the cash to launch your own business when you don’t have it yourself.
This can extend to friends of friends, friends of family, and family of friends. Pretty much anyone in your personal and professional network.
This will be the easiest and cheapest money that you can get to fund your startup. You should still approach it professionally, and create a professional presentation and pitch. As well as putting well-written legal agreements in place.
Just make sure that you are thinking ahead, and about how adding these people to your cap table, and the financial commitments and decision-making authority you are giving will impact your company later. Including your future fundraising efforts.
Angel investors are often the next step on the startup fundraising journey. These are wealthy individuals. In addition to family offices and angel groups. All of which invest private equity into startups.
They aspire to be a part of great things and earn outsized financial returns on their investments.
Angels come in at the earliest stages of a startup. Often when it is still a vision, mission, and a charismatic cofounding team out to do something big.
Startup accelerators are programs designed to help fast-track promising startups. They do this with an intense program that forces entrepreneurs to make progress. The application process for the best accelerators can be tough. Though acceptance can come with a modest amount of seed funding, coaching, and other support. All of this culminates in a demo day where founders present to another round of investors.
VCs have traditionally come into play later in the life cycle of startups. However, there have been periods when they invested large amounts much earlier. Especially when there is a strong personal relationship.
VC investors are going to have much higher expectations, and are likely to expect a significant amount of equity, and perhaps even control in exchange for their investments. Though it can help supersize your startup and grow much faster.
Self-funding is another common option. Many entrepreneurs start out this way. Whether it is the cash they’ve gained from the sale of a previous startup, personal savings, rolling over an IRA or 401k from a previous job, or using their personal credit.
This can be very powerful for limiting the outside pressures and demands on your startup as you get started. Once you have proof of your business and traction, you will then also have more negotiating power and will have to give up less when you do bring in outside investors.
However, it is also worth noting that many entrepreneurs that could easily put millions of their own money into their venture and fully self-fund them do choose to raise and bring in investors early for the other benefits of bringing them on board, beyond the money. Before they reach out to financiers, they must estimate how much cash is needed for startup costs.
If you’re ready for more in-depth information on how to determine the amount to raise in your fundraising round, check out this video I have created. You’re sure to find it helpful.
How To Get Started
Create A Budget & Break It Down
List and lay out your financial needs. Break them down by your milestones. You probably don’t need all of this money at once. Raise enough to get to the next level, at which you can raise more.
Think in increments of 6-18 months. How much will you need to get through that, and build a stronger business during that time?
Create A Winning Pitch Deck
No matter who you are raising money from, you want a strong pitch deck and verbal presentation. This is true for friends and family, angel investors, VCs, and others.
Check out existing proven pitch deck templates that you can plug your data into, and streamline this process to get raising faster, and get more yeses.
Recruit Great Advisors
Advisors are going to help make all the difference in your venture. They can help advise you on fundraising, creating your pitch deck, and making your company more attractive to investors, and may make vital introductions for you.
Raise Your First Round
Nothing is going to happen unless you make it happen. Take action and get out there to start raising money.
Show What You Can Do
After you put that first money in the bank, start proving what you can do when given capital. Then you will be able to raise ongoing rounds of debt and equity capital to grow and expand your business. Everyone likes to make a great investment. Show them that your company is the investment they want to be making.
How much cash do you need for startup costs? The reality is that it can vary dramatically.
It can take over $100M to get some ventures going. In other cases, you might get started with just your cell phone.
Creating a budget is important. There will certainly be many expenses and investments to be made on the way. Yet, there are also ways to optimize this and to find the cash you need to get started and grow your startup.
Do not let a lack of current funds hold you back. Know where to find the money, create a great pitch deck, get great advisors, and start forging ahead. Start by creating an estimate for how much cash is needed for startup costs.
You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.