How much money do you really need to start your business? Probably not what you expect, and certainly less than before the Internet
You think you have it tough scraping together enough funding for your startup? Well, let me tell you about the old days, when funding a startup cost real money.
O.K., we didn't have to wear second-hand clothes and skip meals. But when I became involved in helping a team of entrepreneurs launch a health-newsletter business in the mid 1980s, the expected expenses were daunting, especially for a enterprise that likely wouldn't be especially attractive to venture capitalists (BusinessWeek.com, 2/4/08).
The then-newly introduced Apple (AAPL) Macintosh computers, ideal for publishing, were $2,500 apiece, and we needed four. A laser printer (black and white was the only option available) was $5,000. There were photocopy and fax machines, which would be another few thousand dollars. A phone system was thousands more. Rent for a small office in Mansfield, Mass., would be $1,500 a month, or $18,000 annually.
The Tip-of-the-Expenses Iceberg
And then there were the marketing expenses, the main one being a direct mail campaign to obtain subscribers. We figured the cost for renting lists of potential subscribers, putting together a mailing package consisting of a pitch letter and glossy brochure, and postage at about $1 per package. Figuring a 1% response rate, it would cost us about $100,000 to send out enough pieces to reach our initial goal of 1,000 subscribers. Monthly expenses for printing and mailing the newsletter could be expected to be another $4,000, or about $50,000 annually.
So we were looking at something approaching $200,000—in the neighborhood of $400,000 in today's dollars—and we hadn't even begun accounting for salaries. Moreover, this was merely a test of the concept—even assuming we hit our 1% response rate, we wouldn't know for sure if the venture was viable until a year later, when we saw what the renewal rate was. In any event, we'd have to invest possibly another $100,000 or more to go after additional subscribers.
Today, a similar consumer publishing venture could dispense with nearly all these expenses. The computers, copier, and fax, together with a color laser printer, could be had for $5,000 or less, total. No need for rent, since the team could work virtually for the first year. Forget, as well, about the phone system, since the team would communicate by e-mail and cell phone. There'd be no snail-mail direct-marketing approach, or printing expenses, since everything would be on the Internet.
Use Your Savings for Marketing
Now, this isn't to say today's publishing venture wouldn't have any startup expenses. But contrary to what startup consultants may advise, the expenses for tangible things—equipment, offices, and brochures—are much lower today than they were 20 years ago or can be avoided altogether.
And even more significant, today's startups can use the money they save on traditional fixed costs to deal with their key challenges: building and managing a Web presence (BusinessWeek.com, 9/10/07) and marketing their products or services, online or offline.
The cost of handling these challenges can vary widely. Many startups reduce the expenses associated with building and maintaining their Web site by subcontracting out key tasks to low-wage countries such as India or the Philippines and by using free open-source software.
On the marketing side, it's possible to run up huge charges generating clicks via Google ads. One entrepreneur I know tells the story of how he neglected to cap his expenses and wound up with $4,500 of ad costs in a 36-hour period from click-throughs on his Google ads—costs that failed to generate any revenues.
Smart entrepreneurs shave such marketing costs by collecting e-mail addresses of prospects and using search engine optimization techniques to increase the rankings of their Web sites via links and traffic.
Here is how these techniques translate into an overall startup approach designed to take advantage of today's low-startup-cost climate:
Reduce fixed expenses by going virtual for as long as possible. To the extent the founding team members can work from home and use e-mail and cell phones to communicate, fixed expenses like office space and furniture can be minimized. At some point—usually when the team finds it must bring other people aboard to accommodate growth—an office will likely become necessary.
Avoid hiring people—engage contractors. Even when it's necessary to bring in additional help, using contractors can be cheaper than hiring employees (BusinessWeek.com, October/November, 2007). Individual projects and per-hour expenses may be higher than employees, but using contractors enables startups to retain spending flexibility.
Keep online development costs in check. Setting up a sophisticated Web site usually is more involved and takes more time than expected. It's essential for startup companies to monitor progress and expenses closely, especially if offshore developers are involved. Divide such projects into segments and set a project cost for each segment, if at all possible.
Put as much of your money into marketing as possible. Professional investors always like to see a company's major investment going into sales, public relations, and promotion. Using Internet tools such as search engine advertising, entrepreneurs can quickly and easily test different messages and measure return on investment—say, by monitoring click-throughs (BusinessWeek.com, 11/12/07) against sales.
The main goal of any startup is to test assumptions and obtain feedback. It's increasingly possible to carry out that goal at a lower cost than ever. The old days don't look very romantic in today's climate.