Monday, June 18, 2012

The Cost Equation for a Startup is Better Than Ever

I come from a high-tech software background, and only a few years ago, it would cost at least a million dollars ($1M) for a team of professionals to produce any commercial software product. Now, with open source software components, and low-cost development tools, the same job can be done by one good hacker for a few thousand dollars.

Even for low-tech startups, the scope of information available on the Internet, and its global reach, has had a similar financial impact on the many other challenges facing every startup founder. Here are a few examples:

  • Setting up the business. Establishing the legal structure for your business, registering trademarks, filing copyrights and patents, and drafting partnership agreements used to require extensive attorney fees and ongoing consultation. I now see and believe business plans that budget $1K for all this, versus a previous $20K or more.

  • Facilities and staff. Founders now routinely use their home to operate their startup until they are well into the revenue phase. No office space rental, no secretary, and no accountant are required. That’s a burn rate of at least $10K per month that can be eliminated if you are handy with computers and Quickbooks.
  • Technology costs. We all know how much costs have come down on computer hardware, computer software, printers, PDAs, high-speed internet access, servers, and security measures. Skip the IT consultants and build an entry website yourself to save $50K. Do basic Search Engine Optimization (SEO) and Marketing (SEM) yourself.
  • Sales and marketing costs. Print your own collateral and marketing materials until the business is rolling. Use the Internet and social networking instead of public relations companies and advertising agencies. Try Web-Ex, free teleconferencing, and Skype instead of international travel for client meetings. Savings can be huge in these areas.
  • Manufacturing cost and lead times. Remember when you had to build a $1M factory to roll-out a new product? Now you can get a product built in China almost overnight with minimal up-front cost, with delayed payment based on first-customer order commitments. With the struggling economy, manufacturers everywhere are negotiating great deals.
  • Wages and benefits. Obviously, if you can do most of the work yourself, you need fewer employees, meaning less for payroll tax, benefits, and workers compensation. As a rule of thumb, you should double every employee’s salary in estimating employee costs, so less is more.

I recognize that different small businesses will have different types of startup costs. For example, a furniture retailer might need a storefront and staff, while you might run an online retail business, at home in your shorts, with no facility or staff at all. That wasn’t even possible a few years ago.

As a result, being an entrepreneur in now within the financial reach of almost everyone. No need to make the assumption that you will need a rich uncle or an angel investor for every idea you come up with. See my interview a couple of years ago with parallel entrepreneur Rich Christiansen, who has started 28 businesses with a target bootstrap investment of $5K each.

Best of all, it’s even considered “ultra-cool” these days to be a lean startup. Of course, a word of caution is also in order here. It makes no sense to rush headlong into a commitment as big as starting a new company without doing your homework on viability first. See specific guidance on “How to Give Your Startup Idea The Sniff Test.”

In summary, I see a historic shift taking place in the world today. More than ever, people are striking out on their own and starting their own businesses. New cost equations brought about by the Internet and social networking are causing a revolution, and a new age — the age of the entrepreneur — is dawning. Don’t be the last to get on board.

Marty Zwilling


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