The following is adapted from Startup Money Made Easy: The Inc. Guide to Every Financial Question About Starting, Running, and Growing Your Business, by Inc. editor-at-large Maria Aspan, published in February by Harper Collins.
How much money do you need to start something new? Ten years ago, the average cost of starting a business was $31,150, according to one study. That seems laughably large today. While some businesses still require lots of money to get off the ground, 42 percent of respondents to the 2018 Inc. 5000 CEO survey said they used less than $5,000 to start their first company. While there's no one answer for how much money you'll need to scrape together, these five questions can help you set your startup budget.
1. What kind of business do you want to start? Are you selling a product or a service?
If you're selling a product: You'll need more money up front, for raw materials to create your product; your production equipment and space; and people to do the work, unless you're doing it all yourself. Remember you'll also need to spend time actually selling your product and marketing it.
As Melissa Ben-Ishay, co-founder of mini-cupcake company Baked by Melissa, discovered: "After I was fired from my advertising job, I worked out of my apartment for seven months, by myself. I'd cold-call catering companies and say, 'Hi. This is Melissa from Baked by Melissa. I'd like to bring you a free tasting of my cupcakes.' "
If you're selling a service: Congratulations. Your business should be cheaper and easier to launch.
- You don't have to hire anyone else, at least at first;
- you probably can save money on office space, assuming you can work out of your home; and
- if you're already an expert in your field, with experience and contacts, you won't have to spend as much time marketing your services.
- It may be more difficult and expensive to scale, since growth at service-based companies depends on hiring more people.
When asked about scaling her business, leadership researcher Brené Brown said: "I don't want to wake up one day and have 150 people working here, and five of them are researchers and 145 of them are software engineers and learning platform people. That's not what I want to do. Running that business and my joy list are mutually exclusive."
2. How many people do you need to run your startup?
If you're running a service-based business: Nice. It's easier to launch on your own.
If you're running a product-based business: You can beg friends and family to help... but eventually you'll need to pay for some sort of staff, whether it's full-time employees, part-time workers, or freelance consultants. An increasing number of online marketplaces provide one-off help with specific tasks, as well as remote talent with full-time work. Freelancer and remote job sites include Upwork (all sorts of freelancers), Working Not Working (creative and design workers), and PowerToFly (specializing in matching tech jobs with qualified women and other diverse talent, many of whom are remote).
Don't forget: If you're starting a business that requires full-time employees, your immediate expenses, beyond salaries and health care costs, may include other insurance, rent for your workspace, and retirement plans.
3. Where are you starting your business?
If you picked a cheap place to live and work: The city is your oyster. Growing tech hubs including Austin, Salt Lake City, and Raleigh, North Carolina, are attractive to founders, in part because of their high rates of entrepreneurship and their population growth, according to Inc.'s Surge Cities index of the best places in America to start a business.
If you're stuck in an expensive, densely populated city: Time to get creative.
- Doing business in or near Silicon Valley means lots of competition for office space, and employing some crafty cost-saving strategies. Seattle and many hubs in California, like San Francisco, have some of the highest business costs, according to personal-finance website WalletHub.
- One California-based startup, social-media analytics firm Buffer, moved to save some rent in 2015 by closing its San Francisco office and covering co-working memberships for employees who wanted them.
- Some companies manage remote workforces at scale, such as 800-employee software firm InVision. But experts warn that face-to-face collaboration can be critical for some organizations.
You can also save money if you can work out of your home; or can barter for office space.
In an earlier era, chocolate mogul Jacques Torres landed free rent in Brooklyn: "Since I didn't have much money, I negotiated with the building owner to give me the space rent-free for a year and a half."
4. How quickly do you need to get your product or service to market?
If speed is everything: Get that pitch deck ready if...
- you're worried about competitors getting to market first;
- your business idea solves an immediate problem; or
- you're building an expensive product. Think manufacturing, biotech, finance, or other high-tech, large-scale businesses (e.g., Uber, Lyft, WeWork, Airbnb).
As Jennifer Fitzgerald, co-founder and CEO of insurance-tech startup Policygenius
discovered when she was trying to get her company off the ground: "When my co-founder and I decided, 'Yep, there's enough here for us to leave McKinsey and build a company,' we knew right away we needed to raise money" to build the product and pay employee salaries. "Also, insurance is an expensive industry to build a business. Customer acquisition is expensive."
If you're willing to be slow and steady: Pinch those pennies.
- Fundraising is difficult and time-consuming, and most founders have to bootstrap their businesses, at least initially.
- Only 3 percent of respondents to the 2018 Inc. 5000 CEO survey said they used venture capital to start their business; 43 percent said they used savings, and 15 percent said they used credit cards or loans from family and friends.
- Some founders never take outside investment and still find success (e.g., S'well and GT's Living Foods).
Says Ben Chestnut, co-founder and CEO of Mailchimp: "My mother used to tell me, 'You are the only person you can depend on to put food in your mouth.' So, in the early days of Mailchimp, it never occurred to me to borrow money or get funding to grow my business. If I need to make more money, I find a way to serve more customers--just like my mother taught me."
5. How long can you afford to live without a salary?
If you need a salary immediately: Expect to keep your day job.
- Only 28 percent of CEOs who responded to our 2018 Inc. 5000 CEO survey said they started paying themselves immediately.
- Don't count on a big paycheck. When they started taking a salary, 45 percent of responding CEOs said they paid themselves less than $50,000.
If you can live for a year without a salary: Congratulations--you're in better shape.
- 31 percent of CEOs responding to our 2018 Inc. 5000 CEO survey said they waited 12 months to start paying themselves. Another 18 percent waited two years.
Debbie Sterling, founder of STEM-focused toy company GoldieBlox, on getting her company off the ground: "I saved as much money as I could, so that I had enough in the bank to last me an entire year, and put all of my attention into GoldieBlox. ... Nine months later, I launched a Kickstarter campaign and raised more than $250,000--and I was finally able to give myself my first paycheck as GoldieBlox's CEO."