From Inc. magazine
What’s the one thing a startup success story often leaves out? Exactly how much it costs to get going.
By Ilya Pozin who is a serial entrepreneur. He is the founder of Pluto TV, a free television service, Coplex, a startup development studio, and Open Me (acquired by Rowl). Named one of Inc.’s 30 Under 30 entrepreneurs, Pozin also has columns appearing on Forbes and LinkedIn. You can keep up with him on Twitter. @ilyaNeverSleeps
Aspiring entrepreneurs love to follow stories on the latest million-dollar startup idea that’s skyrocketed to success. The tale of how the company came out of nowhere and now has investors lined up around the block gives them hope that one day they can reach that level.
However, there’s one thing those stories often leave out: how much startups cost to get going. There’s no mention of how the entrepreneur budgeted his money or the price he had to pay to make his dream a reality. And because of that, many inexperienced founders are unprepared for the financial aspects of running a company. I think that’s a disservice to all innovators.
So let’s talk about it. What does it really cost to launch a startup?
First off, understand that each company is different. It won’t take as much money to produce an app as it would to develop an intricate piece of surgical equipment. Still, there are fundamental financial decisions every startup faces. Owing to my personal experience and what I’ve witnessed through my company, Coplex, a startup studio that works exclusively with founders to prove, build, and iterate their startups, I can tell you about your options and the associated costs.
To better understand how finances change, let’s look at the different phases of building a startup:
1. Validation/Prototype and MVP Phase
The first step off the starting line is seeing if your idea is viable. Of course, you think your company can be a game changer, but you need to prove you’re not the only one with that opinion. During this phase, you’ll begin to make decisions that define what your company will actually do. It’s how you turn an idea into a reality that people are interested in.
The goal isn’t to develop and build a perfect end product right now. What you’re shooting for is an MVP, or a minimum viable product. This is something that proves there is a demand for your startup.
How you get your MVP is through iteration. Build landing pages and take out ads to see how people respond to your concept. Find ways to drive users to your website and see what happens. Look at what actions they take, how long they spend on which pages, etc. From there, take what you’ve learned and refine your product.
What options are there to complete this phase, and more important, what do they cost?
For nearly free: Get a friend or two on board by offering them some equity in the company. Look for partners with designing and coding experience. Then have them start building. Along the way, test each step by spending a small amount of cash on Facebook ads. That will expose people to your product and see what resonates with them.
This method is by no means foolproof, especially if this is your first startup. Unless you’re familiar with lean startup principles, it’s highly unlikely you’ll end up with a good MVP. The truth is that most startups fail because the execution was off or mistimed. So relying on luck is a risky route to take.
For around $50,000: Being the great entrepreneur that you are, you’ve managed to get $50,000 together to get your idea off the ground. Now you have the resources needed to hire an experienced startup studio to help you develop an MVP and get your concept to market.
If you choose this option, an experienced team will be at your disposal to handle everything from product management to design and development to growth marketing. Assuming the team has mastered the lean startup process, you can hopefully go from an idea to revenue during this period. And that backs up the viability of your product.
Again, this isn’t a guaranteed option. Every so often you discover something during this initial phase that invalidates your entire idea. But by then, the $50,000 is already gone. However, most of my experience has shown that if you can get enough people behind your idea and raise that amount of money, your concept has real potential.
2. Product/Market Fit Phase
After running your MVP through a few rounds of iteration, it’s time to go from a product to a business. It’s harder to price out this phase, since it depends on what type of company you’re trying to create. This is when you’re figuring out how to grow and scale. You do market research to see how big of an audience is actually out there and what portion of the market you can potentially capture.
This is also when outside funding occurs. After all, now you have the data and evidence to prove to investors that your startup has merit. In general, most entrepreneurs shoot for $200,000 to $500,000 in the seed round.
During this phase, you’ll need to set KPIs, or key performance indicator goals. These will define what you need to accomplish to become a sustainable company. In most cases, the choices are to plan to do another funding round in the future or to become profitable.
To meet those KPIs, you’ll need to continue the iteration and testing process. But remember, don’t attempt to go too big. Build a little at a time and see what the market does in response. Then look at your results and adapt.
So, how do you build it?
There are two options here:
Create your own team. You find partners, consultants, or employees to help you grow. You’ll look for team members who fill in the gaps of your own skill set. Just make sure you have an expert in each of these areas: product management, design, development, growth marketing, data analysis, and sales.
The chance you’re taking with this route is to bring on the wrong or inexperienced people. On the other hand, a tight-knit startup team is a family. They are 100 percent invested in the company and its core idea. It’s difficult to put a price on that type of passion and dedication.
Use an outside team. Again, you can hire startup studio services, like we offer at Coplex, to continue iterating and testing your MVP. They’ll help you refine your market fit.
While it’s more likely a team like this will have the experience necessary to expand your company, the reality of the situation is that this project isn’t their baby. They’ll do their jobs and get your startup to the next level, but don’t expect to bond over late-night brainstorming sessions.
Both options’ costs are dependent on how long it takes you to complete this phase. For the first option, the total rests on how many people you hire. As a rough estimate, plan on $100,000-plus a month for every 10 employees. With the startup studio option, plan on at least $100,000 to figure out your perfect market fit.
So, knowing all that, which path are you going to choose to cover your startup costs?
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