How much does it cost to start a business? In other words, how much money do you need to start your own business?
One of the top excuses many give for not starting their own business is not having enough money. It is also true that running out of money is the number one reason that new businesses fail.
So, how much do you really need? Have you been needlessly wasting time, when you already have enough? Or do you need to find more financing or capital to really make sure you have the juice to make it?
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Here is the content that we will cover in this post. Let’s get started.
- 1. The Truth About Business Startup Costs
- 2. Basic Organizational Costs
- 3. Figure out how to keep these costs to the minimum.
- 4. Marketing Costs
- 5. Use whatever free tools you can find.
- 6. Carrying Costs
- 7. Hiring
- 8. What Justifies Needing More Money To Startup?
- 9. Staging Your Funding Needs
- 10. Self-Funding
- 11. Friends & Family
- 12. Grants & Awards
- 13. Angel Investors & Startup Accelerators
- 14. Customers
- 15. Venture Capital
- 16. Business Loans
- 17. Summary
The Truth About Business Startup Costs
There are two ways to look at how much it costs to start a business. The first is, what are the basic costs to get off the ground and get started? The minimum you need to frugally bootstrap your way to profitability. At least to begin with.
Of course, many aspiring entrepreneurs just look at the stories in the media of startups raising millions and hundreds of millions of dollars. They think if they can land a big chunk of money like that they can get started.
Of course, they don’t typically start out with those headline amounts of funding. They come over time. Though some types of startups may need significant upfront funding to really get moving.
That is rarer than you’d think. Most don’t. Though some startups may rely on large amounts of capital to function and get big as fast as they can to make it work.
In most cases, you don’t need as much as you think. There are countless business successes that got started for less than $10k.
Even Facebook reportedly got started for $1k, and they’ve done a lot with it, right?
You will need tho to raise capital later on in order to scale things up. Keep in mind that in fundraising 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.
Basic Organizational Costs
Let’s take a look at the most basic business startup costs. What you really need, without the fluff and waste. Seriously, how much does it cost to start a business?
You probably don’t need office space. Perhaps, you don’t need lots of inventory. You don’t need to equip teams of people with equipment and fancy computers.
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You do not need a $100k website or a $1M a month Facebook advertising budget. To create a company you will at some point need to incorporate and register your company somewhere. Some very successful startups even put this off.
It’s smart to invest in professional services for this. Yet, you may be able to just do it yourself online for not much more than $100, depending on where you incorporate.
You may not even need a company website to start. Though you will at least want to register your domain name. That can cost as little as $10.
Though if you wait too long it could cost six or seven figures to get it. LinkedIn and Twitter handles are free. You can do a lot with those.
Figure out how to keep these costs to the minimum.
You’ll definitely want an email address. You can get a custom business email address via Google’s G Suite for around $5 a month.
If you don’t have one, then you’ll definitely want a phone and probably a laptop. Though today, you could actually just use either or to do just about everything you need.
To accept money and process payments you’ll need some type of account. Paypal is free, though many business checking accounts will require at least $100 to open, and a higher monthly balance to avoid the monthly service fees.
At this point, you really don’t need more than $300 to start a business and start doing business. Consider these factors when figuring out how much does it cost to start a business.
No matter how good your concept, business model, or product is, 90% of your success is going to rely on marketing, and then sales.
Unless you are already a marketing ninja, then this is probably going to take a bit of testing and iterating to perfect. You need to be careful of burning too much, too fast until you have nailed your conversion rates and unit economics.
Otherwise, no matter how much money you think you have, you can burn through it in just a couple of months, with little in the way of results.
You do need a marketing budget, but you can start out small, and snowball it as you get sales and are bringing in money to scale.
Use whatever free tools you can find.
There are plenty of guerilla marketing tactics to get started with that don’t have to cost a lot. In fact, they can even help do wonders in better understanding your customers, expanding your network, and honing your product and machine before pouring in the capital.
One of the most basic is to just get out and knock on doors and talk to prospective customers. If you want to splurge you can invest in a few cups of coffee to do this.
You can use LinkedIn, Twitter, and email for free. Even services like Mailchimp can help you do email at a reasonable scale for free as a brand new startup.
Producing content is one of the most powerful and high ROI marketing efforts you can make as a startup, and even a large billion-dollar company. You may not be able to afford $100k per article like the New York Times, but you can blog and publish articles for free, or outsource them for a few hundred dollars to get going.
You can even publish your own press releases and get in the news for a few hundred dollars. That alone can go a long way to gaining visibility and credibility. So, do factor in effective marketing strategies when estimating how much does it cost to start a business.
As we already mentioned, running out of money is the biggest threat to young businesses (or all businesses really).
Any overhead you sign up for has to be sustainable. Be careful of anything you sign up for from business banking fees to internet service to software subscriptions and salaries.
You should be financially prepared to cover these ongoing expenses for at least the first 3 to 6 months, if not 12. Assume it may at least take that long to start bringing in money. It takes much, much longer to break even.
You can’t be the master of everything. You may be the best in the world in your industry. But you can’t be that, and the best lawyer, accountant, manager, and salesperson. You can try to dabble in all of these roles a little at the beginning, but you’ll go a lot slower and will do less well on every front.
Fortunately, hiring has changed a lot. Multi-billion dollar companies have been built on remote workers and on-demand, outsourced help for well over a decade. Most new young businesses only need on-demand outsourced help. Not big salaries and compensation packages for in-house staff.
Remember that the success of your business directly relies on the quality of the people working with you. If you want to be the leader in your space, then you need the best marketers, product, UX, and service reps in your industry. With this on-demand model, you can afford that, even if you only use them for a couple of hours a week or month.
There are lots of creative ways to compensate for great talent too. Cofounders, executives, early employees, and even advisors can often be at least partly compensated with equity shares in your company.
What Justifies Needing More Money To Startup?
Hardware startups and physical product startups obviously may need more money to build prototypes and initial products. As well as those that need teams of developers to code complex marketplaces.
Sometimes this can be millions of dollars. Though in most cases, startups really don’t need this money before they get started or begin making sales.
Some business models will only work on a big scale. The numbers and business just won’t work unless they can get to some scale. Think marketplaces and things like uber. More funding can make that possible, or subsidize losses until mass shows up.
For those set on raising millions of dollars to go all in, it can also take money to run a strong and successful fundraising campaign. It may mean spending as much as $50k or more on a fabulous pitch deck. Plus legal paperwork, creating videos, and marketing the campaign.
Still, in all of these scenarios, there can be scrappy ways to get started with a lot less and build up funds as you go. Think of all the strategies you can use to minimize costs when calculating how much does it cost to start a business.
Looking for more information on how to determine the amount to raise in your financing round? Check out his video I have put together explaining in detail the essential steps you must take.
Staging Your Funding Needs
‘Getting funded’ doesn’t come all at once. It is a constant process of ongoing fundraising campaigns that happens in stages or ‘series’. With new capital often being injected every 6 to 18 months.
Often at the beginning you can or may have to start by self-funding your venture. This may be as little as $1,000, or it could be $10M. It could come from personal savings, or personal credit, like credit cards or personal loans.
Friends & Family
The next stop on this journey is typically friends and family. This is usually a more informal fundraising round. You may still present a business plan and pitch deck, but they are most likely to give you funds because they believe in you as an individual.
How much you can bring in at this point will vary widely depending on the financial resources of your personal network and connections.
Anything from $10 to $150k might help you get to the next step. Though it could be $1M with the right connections.
Grants & Awards
You may be able to apply for grants or enter competitions and win money for your business that you may not have to pay back. This can do a lot of your credibility and visibility, without taking on debt or giving up ownership in your company.
Angel Investors & Startup Accelerators
The next rung on the ladder may be funding from individual angel investors or startup accelerators. They may offer you five or six figures in seed money, as well as mentorship.
These may be passive or intensive three-month sessions with a cohort of other entrepreneurs, where you are sprinting to get to the next business milestone.
Don’t overlook your customers as a financial resource. If they love what you are pitching they may offer to invest in you.
At a minimum, they may just buy on pre-order, and give you the cash to build and deliver the product. It means no debt or diluting equity. Factor in these funding sources when estimating how much does it cost to start a business.
Venture capital, strategic corporate capital, and private equity are all institutional-level forms of funding. This usually comes into play later once you have proven your concept and can show some traction and data.
This is bigger rounds of funding, which often requires giving up board seats and chunks of equity. It is a path toward an exit. Either via IPO or M&A deal.
On this journey, you may also be able to supplement these other sources of capital by borrowing for your business. This can range from business credit cards to small business loans, to merchant advances and factoring loans, or asset-based lending, like mortgages or equipment financing.
Others may simply need credit facilities to float themselves between orders and receiving payment. All of these funding options should be on the table to get your business through to the next stage.
How much does it cost to start a business? For some it is millions. For most, it can be less than $10k, or even $1k. Know what is a distraction and luxury, versus what you really need to spend on. Be frugal and stay flexible on the many potential sources of funds to grow your business as you make progress.
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