In this day and age of lean, low-cost, bootstrapped technology startups, it’s easy for founders to ignore the issue of startup capital. Years ago, it was probably the issue given the most attention. Many brick and mortar businesses took $200k or more to start. Even technology startups just 10 years ago would have had to consider initial costs in the hundreds of thousands of dollars.
These days, a dedicated server can cost well less than $100 per month and those leveraging cloud computing can get started usually for less than $50 a month. Open-source software has also lowered costs substantially. Back in the late ’90s, we’d always worry how many database servers we’d need and how much the Oracle licenses would cost us. Remember cost per power units? Today, most startup web businesses don’t have to purchase any server software at all.
It’s no wonder then, that many of today’s startups consider their capital investment at or near $0 and just think about the opportunity costs. My advice is to really consider what your minimal costs are going to be for the first year and fund your company’s checking account with that amount.
Will you need legal services? Incorporation fees (which I’ll address in a later post)? Are you going to run any advertising to promote your business? Planning on doing any give-aways? What will your servers cost you for the first year? Do you need to have some graphic design done for you? Office space? Well… you get the idea. In practice, I’ve found that for businesses that we said would cost “nothing to start”, sans opportunity cost, often can rack up $5,000 to $20,000 pretty quickly.
If you’re not concerned about these numbers, that’s good. Why put the money into a company account, you ask? Because, it forces each co-founder to get serious about the business and put their money where their mouth is. I can’t tell you how many times I’ve witnessed people who claim to be serious about a business, but when it comes time to fund a company that needs $2,000 per co-founder, they decide that they don’t want to move forward. The crazy thing is that often these people were making high 6-digit salaries prior to working on the startup. Somehow, the act of paying the company makes the true sacrifice of startups a bit too real for some. It’s a great test to make sure you’re all on the same page and gives some indication that each is willing to do what’s necessary to make the business a success. Also, it exposes if your founders are really terrible with money. Perhaps they don’t have a few thousand saved up and the company expects to have to go 6 months before funding or some liquidity event. How are they going to pay their living expenses? If they have such poor money-management skills, how are they supposed to manage a business? It’s better to have these kind of founders quit early.
In short, come up with a reasonable number and require that each founder antes up their fair share. It will save you a ton of wasted time in the long run.