The Good News About How Much Money You Need to Start Your Business
It’s probably not as much as you think, according to this excerpt from Startup Money Made Easy, a new Inc. book.
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In her new book, Startup Money Made Easy: The Inc. Guide to Every Financial Question About Starting, Running, and Growing Your Business (HarperCollins Leadership, Feb. 12), Inc. editor-at-large Maria Aspan provides practical advice along with plenty of examples of how successful entrepreneurs handle their money. The following is an edited excerpt.
So you want to start a business. You've got the idea, you're ready to hustle, but how much money do you need to launch your startup?
The good news: Probably not as much as you think. Ten years ago, the average cost of starting a small business was $31,150, according to one study. But that seems laughably large today: While some businesses still require lots of money to get off the ground, at Inc., we regularly hear from founders of fast-growing companies who started their businesses for hundreds, not thousands, of dollars.
"Today a smart entrepreneur with a website can start making in six months what we were making after six years," says Bert Jacobs, cofounder of the apparel company Life Is Good.
Technology's rapid advance is bringing down many startup costs, as Jacobs points out. He and his brother John launched the first iteration of their company in 1989, with $200 borrowed from another brother, Allan. The early days were scrappy, to say the least, as Jacobs told Inc.'s Leigh Buchanan in 2015:
We would have used that technology if we'd had it. Instead, we spent years building a company with employees we met at pickup basketball games; customers we joked with in the streets while keeping one eye peeled for the beat cop; and advice from retailers up and down the East Coast whom we dropped in on. It may not have been the most effective process. Definitely it wasn't the most efficient. But a lot of our company's values came out of that early need to do things cheap and in person.
Life Is Good now sells $100 million worth of apparel every year. And there are parts of Jacobs's experience, especially the grit and patience, that remain relevant today.
If you're dreaming of starting a business that could someday rival his success, you don't necessarily have to spend money in the same ways. Today's large ecosystem of tech services -- what we at Inc. call the "instant startup kit" - can help you get your startup off the ground cheaply and quickly, as I reported in 2016:
Websites, billing, payment processing, cloud computing, communications, funding--all have been made simpler by the likes of Squarespace, Slack, Kickstarter, Dropbox, Amazon's ubiquitous Web services division, and PayPal. ...In the past ten years, these building blocks have greatly reduced the time--and cost--involved to start a business, especially high-tech ones. Thanks to "the emergence of the internet, open-source software, cloud computing, and other trends," some experts estimate tech-reliant ideas "that would have cost $5 million to set up a decade ago can be done for under $50,000 today," according to a 2014 paper from the National Bureau of Economic Research.
Good news: You probably don't need $5 million to start your business! You might not need $50,000 or $30,000. In fact, you might not even need half of that: In 2018, 42 percent of Inc. 5000 CEOs responding to our annual survey said they used under $5,000 to launch their businesses. A combined 21 percent said they used between $5,000 and $25,000.
The amount of money you need will vary depending on several factors, including what kind of business you want to start: What are you selling, and is it a product or a service?
Product-based businesses tend to be more expensive to launch. If you're making T-shirts or baking cupcakes or designing mobile apps, you'll need the raw materials to create your product, the equipment for the production, the people to perform the manufacturing or baking or coding, and the space to do the work.
Planning on doing it all yourself, at least at the start? Remember that you'll also need to spend time actually selling your product and marketing it so you'll have customers interested in buying it.
Service-based businesses are, in many ways, a lot easier and cheaper to launch, particularly if you already have industry expertise and contacts. If you're a lawyer or an accountant or a digital marketing expert or have any other specialized business experience, you have the product (your expertise) and, potentially, the market.
You can start selling your services on your own to people and companies that may be familiar with you and your work. You don't have to hire anyone else, at least at first. You don't necessarily have to spend more money on office space, as long as you can work out of your home. And ideally, you don't have to spend as much time marketing your services.
The downside: It may eventually be more expensive and complicated to scale your business, since your growth will depend on figuring out how to transfer your knowledge to other people.
Other factors that will determine how much money you'll need to launch your business include how many people you need; where you're starting your business, and how much space you need; how quickly you need to get your product or service to market; and finally, how long you can afford to live without a salary. Once you've answered these questions, you can take the next step and start to scrape together the money to get your business off the ground.