How much does a start-up cost?

How much does a start-up cost? The trite answer is more than you think. A more helpful thought is £1.5m of investment and £50k per month running costs when the business is up and running. These numbers come from our portfolio and are backed up by conversations with other start-up companies and to illustrate the numbers is the story below.

Imagine you're a 35 year project manager who has always been frustrated with the software tools available. Over a beer or two you have had many conversations about ideas for better tools, particularly with one of your colleagues. This has resulted in plenty of paper, a couple of PowerPoint presentations and the odd hangover – but nothing more. This could have carried on forever but for the day the company was taken over and a generous redundancy package was on offer.

After many discussions at home and with your colleague you decide to take the package and use the money to put your business dreams into practice. There is one proviso that your colleague, who is a natural sales person, would join you at some point in the future.

You spend the first month as an entrepreneur attending events and getting your head round what you had let yourself in for. The next step is to write a plan, a pitch deck and get some form of product developed. As you are not a natural “techie” you ask an old university mate to help and he agrees to put in some evenings and weekends. The net result was the first demonstrable prototype built by a couple of Romanians which could be described as an MVP (Minimum Viable Product) in the loosest sense of the words. So after 6 months you were on your way.

For the next step you decided to immerse yourself in the local start-up seen and join an Accelerator and grow a bread to boost your hipster credentials. After another 6 months and many meetings and coffee you secure £150k of investment from a group of business angels. You make good progress and the angels agree to put in another £150k as long as your ex-colleague and friend from university come and join the business. With some sales prospects in the pipeline they both agree to take the plunge. As the business grows with investment you get some initial orders and with your colleague joining the sales pipeline really begins to grow. With some early metrics about the cost of customer acquisition and average lifetime value you persuade an early stage fund to invest £300k to assist with growth.

So by now 2 years have elapsed since the first investment and you have a product and in a good month you achieve £10k of sales. However an analysis of the way forward shows you will need a bigger team to both survive and progress to the next level:

  •  The product will need an upgrade and the roadmap driven by customers will need a tech team of 4 plus the CTO;
  • Customers and pre-sales work need a support team of two;
  • Sales needs an additional external sales person and some inside sales;
  • Online and offline marketing will need someone; and
  • Finally you get requests for consultancy which is great because it is paid work but is a load on the team and requires an extra person.

Adding all this up with the existing running costs comes to £50k per month but if you don’t do it the business will effectively slowly fade away. So you decide to take the plunge and raise the necessary investment. It is difficult to raise the money in one go but manage to you do it in bits and pieces which is a real drain on you and the rest of the senior team.

So after another three years, including a major product re-write and three fired sales people, you finally get to profitability and have taken on a further £900k of investment in the process which equates to half your running costs over the period.

Reflecting back over the six years since you decided to leave the corporate world you have built a profitable business with sales of nearly £1.5m a year and taken on £1.5m of investment. This has also been at great financial cost to yourself as there are no savings left and the credit cards are maxed out. But you now have a chance both pay yourself a fair wage and get back all the salary sacrifices you have made. Also during the time you have two new additions to the family so a regular income could not have come at a better time.

You have to be congratulated in taking the risk and making it pay off in terms of creating a profitable business. How to maximise the return on your 6 years hard efforts is all the subject of another blog.

The numbers in this story will vary. For example hardware companies will have a smaller tech team but will need working capital for stock and tooling costs which are often a high number. Some software businesses rely on generating market share and therefore investment levels will be higher.

Mike Bowman