When it comes to getting your tech startup off the ground, there are always good news and bad news. The good one is that if your idea is indeed as brilliant as you think, you have good chances to become a new Steve Jobs or Elon Musk and build a big company. But the bad news is that the road leading you to the business you dreamed of will likely be rocky and full of personal and entrepreneurial challenges.
To help you in this way, we decided to dedicate this article to one of the most tricky issues you probably faced right after the ingenious idea for a startup had rung your doorbell. As you may have already guessed, it’s funding, since regardless of what exactly you envision as your future business, it’s crucial to know how much money it will cost you.
Startup Funding (Startup Capital) — is the money needed to launch a new business. It can come from a variety of sources and can be used for any purpose that helps the startup go from idea to actual business.
The Startups Team
Let’s start with a brief overview of typical startup costs.
How to calculate funds needed to start a business
To determine how much money you should collect for your startup, first, think about the costs you will incur during the initial stage, i.e. before your business brings you any profit. So what exactly do you need to open a business? There are many types of expenses you may have depending on your location, industry and future business activity, but here are some categories you most likely have to take into account:
These are all one-time costs related to the incorporation of your business. They may include state fees required for the registration of your company, receiving compulsory licenses/permits, hiring legal professionals, purchasing necessary equipment/furniture, designing a logo, etc.
This is probably the most significant part of your overall costs. It comprises expenses on the development of your digital product, as well as expenses on its launch (including costs on product promotion).
Rent, utilities, taxes, salaries for your employees, payments for other services you plan to receive on a regular basis for at least the first 12 months after the launch must be also considered when calculating your initial startup capital.
The above list is, of course, non-exhaustive. To determine how much money you need to start a business, you have to conduct comprehensive research and define all other additional costs that may apply in your case. Lots of startups fail because their founders underestimate the amount of money they need at the beginning. To avoid this trap, we recommend you to assume that everything will cost more than you expect and some unforeseen issues will likely arise as well. So when you create a budget for your business, it’s a good rule of thumb to consider a small “safety margin”.
Now it’s time to see how much money successful startuppers raised to launch their outstanding products.
Innovative idea and amazing enthusiasm are usually not enough to open a business, you also need funding. Fortunately, you are not the first person on the planet trying to estimate startup costs and there is a lot of data available to help you make sound calculations. So let’s dive right into the hard numbers.
You have probably heard that the average amount to start a small business may be as little as $3,000. However, this does not apply to technology startups.
Of course, if you are ready to go slowly and if you already have a viable product, you may try bootstrapping, meaning that you can start without external funding. Ben Chestnut and Dan Kurzius, founders of MailChimp, did this in 2001 and it took them about six years to turn their startup from a side project into a full-time business.
95% of entrepreneurs have at least a bachelor’s degree.
However, if you do not have a viable product and you aren’t ready to wait that long, you need to be realistic. The minimum amount you must have to develop an application for your tech startup is about $50k, while the average costs for building a successful digital product range between $100k and $200k. Let’s look at some examples:
- Uber. The company was founded in March 2009 by Garrett Camp and Travis Kalanick who provided the first funding of $200k. The beta version was launched in May 2010 and then the company raised $1.3M to scale up quickly at the Angel round to further develop the app.
- Dropbox. Dropbox is another tech start-up that is worth mentioning in the given context. The company was founded in 2007 and raised over $1.2M at the seed rounds in July and September of the same year. The service was officially launched in September 2008.
- Coinbase. The third case is Coinbase, a platform for digital currency exchange. It was founded in June 2012 and in September the company raised $600K at the seed round. This was followed by the launch of the service in October of the same year. It took the company almost two years and over $30M to grow to 1 million users.
So if you still think that you may start and skyrocket your business with little or no money, throw your rose-colored glasses away and brace yourself for an adventurous funding journey. Let’s talk about this in more detail.
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How to get money for a startup
You may feel a little bit discouraged after reading the previous section, but don’t be. There are a number of ways to seek money for your business.
How to Choose a Startup Idea?
Before you decide to launch your own business and choose a specific area, there is much work you need to be first. The main task is to make research in the industry you are going to invest in to find out whether it is worth and actual on the market. Also, it is crucial to choose the location, define local people’s needs, what services or products they would like to use. The next and important step is to create a business plan considering all details and specifications of the chosen industry. To build a successful business strategy from scratch, you need to get a consultation with a Business Analyst who knows all the tiny details and pitfalls in all business areas.
You may have a brilliant idea for a startup, but if you want to launch it quickly and successfully, you also need money. The exact amount of funding you should have to get your business off the ground mainly depends on the cost required for your product to be developed. The minimum threshold for product development is about $50,000 while the average numbers are between $100,000 and $200,000. To raise the initial capital, you can use crowdfunding platforms, apply to angel investors or venture capitalists, or attend startup accelerators and incubators.
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