Startup Costs: Key Expenses to Include in Your Budget
Money is central for launching startups. You've probably heard stories of how some micro-companies were opened with an initial input of as little as $2,000 - $5,000 USD. Yet, in reality, plenty of things affect the actual sum. The real startup cost will vary based on the business size, type, and scope. This is why startup costs can fall anywhere from several thousand dollars to 5 or even 6-figure numbers.
How did we come to this estimate range? Lots of seemingly insignificant things can add up to the total. This can include getting licenses and insurance, buying equipment and supplies, organizational expenses and utility costs, wages, and renting office space. You should also factor in possible legal fees, one-time payments, ongoing expenses, and product development time frames.
So, how much does it cost to start a startup, and how do you calculate an attainable budget? On this page, we'll go over the factors influencing startup costs to help you figure out how much money you'll need to kick-start your company, especially if it's a tech product.
8 Common Business Startup Costs
There are many ways you may go about financing your startup and getting it off the ground. As such, you can be:
- bootstrapping (that is, using self-funding);
- looking for an angel investor who'll believe in you while you're still at an early stage;
- joining an incubator or accelerator program (based on whether you're just taking your first steps or are aiming at scaling);
- trying to get a loan if you have insufficient funds. This could come from a bank, a private lender, or even the SBA. But what is an SBA loan? Well, it’s federally-supported, giving you peace of mind, albeit with some eligibility caveats to know about. Weighing up all of these options is the only way to choose an appropriate loan product;
- or opting for other external ways to get money.
In any event, these aren't just fancy startup terms related to finance. Your funding source and the amount of money you have will predetermine how flexible you can be with your budget.
Nonetheless, no matter how big your "piggy bank" is, you need to know how to stretch money. That's why financial forecasting for startups is essential to make realistic estimates of how much you'll need to invest before you open a startup and to run and maintain it once you do so. Note that there will be one-time and ongoing expenses, fixed and variable costs, as well as urgent and non-urgent ones during various stages of startup development.
Next, we'll review the factors influencing the startup cost to help you plan your feasible budget. We'd like to point out straight away that the figures given below are estimates and may vary greatly based on your region and other things.
Crafting a Business Plan
Putting together a strong business plan should be taken seriously before you start doing anything else. This is the centerpiece of your future undertakings that can serve as a compass for steering your business. It can also become the foundation for future pitch deck creation and a supportive source to help you pitch to investors when seeking funding.
Creating a business plan is important for a couple of reasons as it:
- assists in defining the business goals, objectives, OKRs and KPIs;
- allows to determine the target market;
- helps allocate potential revenue sources;
- enables to identify the possible risks.
When working on your business plan, you have to be clear about your unique selling point and follow the approach that highlights the customer before all. Your plan should also note how your operational processes will work and your possible business development roadmap.
Surely, when the time comes to bring the plan to life, you'll have to be able to think on your feet, iterate the plan, and make a startup pivot if changes are required. That is, it's very likely that you'll have to amend your business plan when it's necessary to give your startup a chance.
Approximate expenses: $500 - $1,000 USD if handled in-house.
Expenses on Research
Doing market research is often an underestimated step, yet going through proof of concept is highly important. These findings can give your initial plan a 360-degree spin.
What if you'll start developing a product that no one needs? Ultimately, if your idea lacks product-market fit, there's a huge possibility that your project will fade into oblivion.
Before you start acting on your business plan, you have to ensure that you've studied your competitors, calculated the market size realistically, know your audience (their needs and pain points), and understand what can be done to create a product that'll bring value and live up to expectations. Going through discovery in-depth can not only help you dot all the i's but also allow you to determine how to:
- approach the product's development best;
- prioritize features;
- determine the required team size;
- estimate your needs for financing.
Approximate expenses: discovery is often passed to an external team with various professionals (e.g., a lead developer, UX designer, and product manager); the phase can last 2-3 weeks and cost about $6,000 - $10,000 USD.
As a rule, you'll be faced with fees associated with incorporating your company. They'll depend on the chosen business structure type. Ordinarily, incorporating a startup as an LLC or a corporation will cost more than if you select in favor of a partnership or sole proprietorship. Therefore, make sure you familiarize yourself with how LLC laws differ by state, browse the restrictions, regulations, and rules that apply in your given location when choosing the most appropriate business entity.
Of course, your country, state, and local jurisdiction will determine the exact costs of the fees for filing business applications. To give you a few estimates, the fee for registering a corporation or if you want to set up limited company can range from $100 to $800 USD, while if annual maintenance fees apply, this may account for an additional $50 - $500 USD.
Consulting with a business attorney can help you understand how an LLC can specifically benefit your situation along with what is the best state to form an LLC and the different costs associated with it.
Approximate expenses: $100 - $800 USD for forming an LLC or corporation.
Insurance Payments, Permits, and License Fees
Depending on the type of company you'll be running, there's a chance that you'll need specific permits that apply to a given industry. The price range can fall anywhere from a few dollars to several hundred dollars.
Similarly, it's sensible to insure your business assets and employees too. The cost of insurance will depend on the coverage (for instance, whether you'll be ensuring property, general liability, or anything else). The number of employees, business size, industry, jurisdiction, and insurance provider matter too. But about $600 to $1,200 USD is the median yearly price.
On another note, if you're getting a payday loan to launch the company, you have to take into account the interest rate and payments. Giving a very rough estimate, you might have to pay about $13,500 USD interest for a $50,000 USD 12-month loan, which should also be considered in your startup costs plan.
Approximate expenses: $700 - $1,500 USD per year for insurance, permits, and licenses.
Supplies, Equipment, and Rent
Either way, you'll need some supplies. For instance, you'll buy computers, computer desks, hardware, furniture, and basic office supplies like a water cooler. 30% of people rely heavily on information provided by water companies. By giving your staff access to a solid water source, you can ensure that they are drinking safe water. Therefore, factor in the cost of equipment and laptops, standing desks, chairs, etc. Surely, how many items you'll need based on the startup team structure and the brands you choose will influence the total.
On average, you should count on $1,000 - $3,000 USD to "outfit" one employee with a basic office chair, a desk, and a mid-quality computer. Do not discard potential expenses for maintenance either. If one's laptop starts running slowly, fixing it might require extra spending. Or, you might think about replacing it. There are many shops online offering affordable prices, like PC International – you can check their store within your research and assess yourself whether to invest in new devices for one or more of your employees, or go for quick fixes.
Plus, you might need to spend money on renting a physical space for your team. Such contracts are often signed for several months in advance. Include the office space's monthly cost and any deposits, fees, or amenities in your budget calculations. Also, add on a few hundred dollars per month on utilities.
Surely, there's a tendency for startups to choose in favor of remote-first work. It's become a growing global trend after the 2019 pandemic outburst. Not renting office space altogether is a great way to cut costs, allowing startups to redistribute their budget and invest this money in product development, marketing, or other things. Nonetheless, some companies continue renting office space, which goes down to individual business needs and employee locations.
Customarily, you may need an estimated $1,500 - $3,000 USD per month to rent office space for a team of under ten people. Yet, obviously, this price can go way up if you choose a fancy location or rent a large office (vice versa, rent may cost you much less if you opt for co-working or other alternatives). Just look at the map below, showing the annual net pricing for office rent worldwide based on recent statistics, note that the prices are in USD per square foot.
In any case, all of this will add up to the overall startup costs and the funding you'll need to get the company going.
Approximate expenses: you'll need about $5,000 - $15,000 USD to get equipment and supplies for a team of five and about $1,500 - $3,000 USD per month for rent.
Technology and Development
If you have a tech business idea and are creating a web-based product, you'll most likely need a domain that can cost you $10 - $20 USD per year. You'll also have to get an SSL certificate to secure your solution and protect data (this can cost $50 - $100 USD per year). Finally, you'll require web hosting for data storage. Different providers have various rates, but hosting may cost about $20 - $60 USD per month. Note that these three often come as packages from a single provider.
Likewise, apart from employee salaries, you'll need tools for work and product development. For example, this can be:
- a content management system or CRM;
- marketing tools (e.g., for SEO, email newsletters, social media);
- data analytics tools like Mixpanel or Amplitude;
- work and task management tools like Jira;
- communication tools like Slack;
- virtual phone system;
- accounts payable software;
- design tools like Figma;
- among others.
Most of these come on subscription and have plans based on inclusions or users. The pricing can range anywhere from $10 to several hundred USD per month. The quantity and quality of the chosen tools will form the overall expenses. Recent finds suggest that CRM tools come at a higher cost for startups than other tools.
What is more, your solution will likely use various third-party plugins and extensions. For instance, you might need to link up a payment gateway (such as Paypal, Stripe, or Braintree), a service for making simple user forms, security tools, or anything else. It's very tough to give estimates and specific startup costs for this point as it depends on your chosen services, their quantity, and terms.
Approximate expenses: you might need about $300 - $1,300 USD per year for hosting, an SSL, and a domain. The expenses on tools depend on the selected set and how many team members you have (but count on at least $2,500 USD per year). What's for extensions and plugins, the expenses are highly individual.
You will need to spend money on brand awareness. Even if you don't invest money in paid ad campaigns, you'll need someone to handle your social media, online presence, and other promotional activities.
Why is marketing crucial? A robust startup branding and marketing strategy can help you create buzz around your product, attract early users and first clients, and help the company become a name.
Expenses on startup digital marketing may vary according to what you include in your scope. Notably, oftentimes many marketing tools (for SEO, content creation, etc.) that are considered "free" turn out to be costly. Not to mention that you'll be paying for employee salaries, SaaS usage, placing PPC advertisements and content on external platforms, and other things.
Approximate expenses: you may spend about $5,000 USD or more per month on marketing.
You have to be very smart about who you're hiring and how as issuing payrolls is a big chunk of the pie (at times, about 30% of the budget or more). Undoubtedly, this is one of the most significant factors impacting startup costs. Based on the business size and type, you'll need to budget carefully for salaries and include payroll taxes, benefits, paid time off, and other direct costs. If you have startup equity, consider getting a separate tool for that too.
For example, you can begin by forming a small team in which one person takes on several roles and proceed to team scaling when the time is right. Calculate the salary-related business expenses according to how many employees you plan to hire and the approximate salaries you'll offer. Surely, to attract the best talent, it is wise to research the competitive salaries in the industry or given sphere.
On another note, you have to bear in mind that the rates for specific roles may be higher than others. Namely, developers from certain geographic locations or those coding using specific programming languages may cost you more than others, which should be regarded in your startup budget.
When it comes to hiring developers for a startup, there are various hiring models and employment approaches. These include finding people to join your company officially, finding individual contractors offshore, or teaming up with a third-party outsourcing partner. Frankly, all in-house employment aspects considered, it may turn out to be much more cost-effective to hire an MVP development company than to sign freelancers or recruit people internally.
Approximate expenses: issuing salaries for a US-based team of five or six people to develop your MVP may cost $70,000+ USD per month, while opting for an analogous outsourcing team from Eastern Europe can cost you a monthly $28,000 - $35,000 USD.
Extra Startup Cost Tips and Considerations
Knowing how to make ends meet and get profit are crucial skills for startup founders, as this will influence the startup valuation and how effectively the venture operates. Yet what else should you keep in mind when planning your budget and trying to estimate the cost of the startup?
Don't Get Blinded by Enthusiasm
Having faith in the success of your product or service is important, yet being too sure can lead to uncalled-for expenses. You have to understand what you can afford now. Therefore, no matter how high your expectations are, always weigh every investment decision carefully to avoid overspending and running out of money too soon. Ask yourself: "Is this purchase essential, or can it wait?"
Remember that when your project is at an early stage, you're still testing the waters, and there are no guarantees when it comes to business. Hence, you should do your best to cut down various ongoing expenses, especially on utilities, that aren't tied to your core processes.
Be Prepared for Unexpected Turns
It's wise to stay on the safe side and set aside some money in case you encounter unexpected circumstances or force majeure situations. You never know what can go wrong in business, say, the customer demand or laws change, or a natural disaster causes a market shift.
So, apart from a contingency plan, you need a reserve fund for emergencies and unforeseen expenses. How much should you set aside? It depends, but having enough resources to help your startup last for at least a few months is a good start.
Keep an Eye on the Burn Rate
Analyzing and monitoring such key performance indicators as burn rate (how fast you're spending money) is vital for early-stage startups and businesses. In essence, you have to always keep one hand on the pulse and:
- monitor your burn rate to know how fast you're spending money;
- track your product metrics to identify whether you're moving in the right direction and make more informed decisions based on data, not guesses;
- make data-backed predictions, projections, and forecasts;
- calculate your negative cash flow.
The bottom line is that as a new business, it's probable that you'll be spending a lot more than you make during your first years. But you need to be sure that your cash runway (or how long you can stretch your budget and operate the startup before your money ends) is solid to ascertain that you're not going into the red.
Poor financial planning is more dangerous than you might think at first. As such, a recent study based on a survey of almost 500 startup founders suggests that the top two reasons causing such a high startup failure rate in 2022 were lack of funds and running out of money.
Select the Tools You Need Carefully
You'll need to choose the right startup tech stack and equip the team with the top tools for building your product and managing the work. However, selecting the right set of tools is worth much consideration. As such, you need to think about:
- solution compatibility and integration simplicity with other used tools;
- the value of the features provided and whether they duplicate the features of other tools;
- how often the tool is used;
- whether you're getting the value for money and the pricing that implies.
There are common cases when businesses use legacy tools with better analogs and more advanced opportunities, such as workflow automation. Similarly, you may be overpaying for features you don't need or opting for software that isn't compatible with your environment.
All of this can lead to wasted money and the possibility of a costly future migration. Not to mention that using SaaS and other tools forms a portion of your fixed expenses and startup costs that generally don't fluctuate. So take the time to compare prices and offers.
Look for Special Offers for Startups
Giving an extra recommendation, you're always free to shop around when looking for the most optimal services. Mind that many providers offer special terms and startup discounts for eligible companies. This can save you lots of resources during your first year or so and cut down your business startup costs. Additionally, it can open up new opportunities like the chance to:
- obtain more perks from partner solutions;
- get access to learning materials;
- take advantage of alternative payment methods.
Concluding Thoughts on Startup Costs for a Business
Planning a startup budget wisely is essential for new businesses. Your money reserve isn't endless, so you have to be certain that you have enough resources to keep the business running for a while, even if you aren't getting any profit yet. Frankly, it'll most probably take some time before you get a stable income. So you must secure your funding, aim to get revenue, and plan your budget thoroughly.
Taking a realistic look at your budget and startup costs can help you raise funds and avoid many common startup mistakes down the line. Plus, such preparation allows for thorough research and improved decision-making. In general, to stay on the safe side, it is considered a best practice to budget a minimum of three months' worth of expenses. Your plan should count in rent, salaries, equipment, and other corresponding spending.
Upsilon has helped many early-stage startups create MVPs within the three-month time frame and assisted them in scaling their business further. If you have questions about startup planning and product development, feel free to contact us. You're also welcome to use our simple MVP calculator to estimate how much building a minimum viable product with a professional team can cost you.