Why do startups need so much money?


12

What are startups raising millions of dollars for? I know running a website can get costly, but seriously, millions? I just don't get it. And if you say advertising, I still don't get it, because the only recent startups I've seen ads for are Groupon and LivingSocial. I feel like the majority don't advertise.
Hiring people? At what point do they need to hire that many more people?
Again... just wondering..

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asked Apr 6 '11 at 14:37
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Aslyesnow
214 points
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  • Remember that not all startups are web-based "virtual" companies. there are companies making new batteries, cutting edge alternative fuels, medical devices, drugs. There are restaurants and bakeries, hair salons and Pier One franchises. In fact, I would propose -- the overwhelming majority of startups are not "virtual web-based companies" and they still all new good financing. – Joseph Barisonzi 8 years ago
  • That's a good point, but I also understand that. It's not as mind boggling for companies that need to manufacture, distribute, etc etc. My questions is more about the foursquares of this world. – Aslyesnow 8 years ago

1 Answer


22

I never used to think it would cost that much either ... but then I started to grow the company.

Each salary has to be paid for 2 years, then have 30% on costs per person on average.
So you have

  • 3 good developers - $80-100K each. Say $300,000 per year.
  • 1 marketing person = $150K
  • 2 sales - $100K each = $200K
  • 2 support people answer questions and fixing things - $60K = $120K
  • CEO $120K

= $890K in raw wages per year x 30% for on costs x 2 years approx $2.3M for a small team.

  • Then you have hosting costs, advertising, and travel costs. It ramps up really quickly.
  • Servers, programming tools, processes and systems, rent on a building to put them all in.
  • Then you do promotions and trade shows ($40K per show minimum) 3 of those per year
  • Then if you make it big and have to scale, you end up with full time PR people, full time web maintenance and performance tuners, HR people, inductions and ... it goes on

And what if you're wrong and half way through the 2 years you have to pivot and do something else...?

Then each specific business has its own unique issues and troubles, they all cost.

... I have 8 developers, 1 key sales, 2 support and me in 2 companies ... we sell through Australia, New Zealand, Canada and the US ... $1M goes out the door pretty quickly each year.

The CEO needs to have enough money to spend in order to build. If they are always paused waiting for the next dollar they may not get the momentum they need.

answered Apr 6 '11 at 15:11
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Robin Vessey
8,394 points
  • Wow, I guess the wages do add up easy. I'm glad you didn't get it in the beggining either :) Can I ask- how many people did you have in the very beggining? – Aslyesnow 8 years ago
  • There were 4 of us and the first year, we were still at Uni, we earn't about $15K-$20K each ... we've improved a little since then :) – Robin Vessey 8 years ago
  • Unless you're paying a company in China to build actual physical goods, labor will be the number one cost to a startup. Developers don't come cheap these days :) – Gennadiy 8 years ago
  • Yeah thats why we started the venture development side of the business, its cheaper for a lot of startups to work with an seasoned company than take the risk on random unknown devs ... if they have some backing we can usually make it stretch further and get them to market in the time it takes them to find the developers (let alone set them up, work out the rules, organise the automated builds and everything else). – Robin Vessey 8 years ago
  • A much needed answer to a lot of Entrepreneurs, I have heard the same question repeat 100s of Times, And then a follow on question, Once you got it going for 2 Yrs say, when do you see the incoming $$, and Whats the normal ROI for the sunken costs... – Shree Mandadi 8 years ago
  • I can't really answer that one, we grew organically (no debt), just reinvest what you earn. – Robin Vessey 8 years ago
  • Hey Rob, its a little off topic, I hope that's ok, but what's your take on outsourcing the development in the beggining to a web-development company? – Aslyesnow 8 years ago
  • Well, it depends. A standard brochure site web company the plays in Joomla I would avoid. A company that can ask you lots of questions about the market, your goals and vision, make good recommendations is key. You should ask them for a mockup/prototype first, agree on the inital scope and walk them through in stages ... otherwise you will run out of money very quickly. – Robin Vessey 8 years ago
  • Thanks! The company I'm going with is going to do just that, wire frame, mockup, get into the real details before they even give me an official quote (but they are charging me for it...is that normal?) They seem like they really know what they are doing. – Aslyesnow 8 years ago
  • Add rental for offices, equipment or everyone, bills. it all adds up very quickly. – Ron M. 7 years ago
  • @Robin Vessey: I would be interested in in how much revenue you have to compare against the costs. I see the point about the amount of money used for this and that, but what if your product kicks off right away (I know its unlikely). Could you cover the costs? (yes, very vague question) Does it really need millions of investment to make it through the first two years as in your example? – Torsten 6 years ago
  • @Torsten Yes it is very possible to start with a profitable business from Day 1. These are typically niche high value / high margin business and you only start when you have the client that pays $10,000+ monthly ... thus you hit the ground running but scaling really big is hard. On the other hand if your advertising driven website that is free to the consumer than its going to take time and a lot of effort to collect enough users to make it viable. There are lots of variations in the middle of these extremes, you need to find one that works with your clients, your offering and your cashflow. – Robin Vessey 6 years ago

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