How Much Money Does a Startup Need?

We hear lots of stories about well-funded venture capitalists and private equity funds making deals for interesting new startups. It sounds exciting, but reality is a little different. Most first-time entrepreneurs don’t have generous financial backers and are started on a shoestring. About 80 percent of first-time startups are self-funded, according to the nonprofit Kauffman Foundation.

Starting off “on a shoestring” can range anywhere from a few hundred dollars to a few million dollars a year. That’s quite a shoestring.

For specifics, I asked a Boston-based Steven K. Gold, who runs the Entrepreneurs Boot Camps and wrote Entrepreneur's Notebook: Practical Advice for Starting a New Business Venture. Many Web site or e-commerce businesses are started with little or no capital, except for living expenses, computers, and Internet access, he says. Building and operating a Web site yourself can cost less than $100 per year – hiring pros for up the front services costs between $2,000 and $9,000.

On the other side of the coin, he says, “a typical startup with 2-3 experienced founders (requiring at least partial compensation) who are developing a new product needs $150,000 to about $5 million to support a year of operations."

So how do you figure out where your startup fits in? Here are tips from the experts.

• Estimate and add up your expenses for each month, while also factoring in any revenue. The cumulative deficit is the amount of investment required, says Gold. Don't forget the costs for marketing your offering.
• Once you determine your expenses, increase that figure by 50 percent to 100 percent, to account for unexpected costs, which are inevitable, says Stephanie Chandler, founder of Business Guide.com and author of New! Leap! 101 Ways to Grow Your Business.
• With those numbers, open a line of credit before you need it, especially if you are quitting your job, adds Chandler. “Once you leave the paycheck behind and start your business, you also have to start over with establishing your credit. Without a verifiable steady income, it’s much harder to get a loan or credit.”

Sometimes, there is more than one answer to how much money a particular startup needs. Ross Blanchard, co-founder of Blanchard & Loeb Publishers, which sells print and DVD manuals to nurses, told me a cautionary tale.

To get his startup off the ground four years ago Blanchard put together four financial plans ranging from a low-cost conservative scenario to an aggressive, expensive grab for market share. Eventually, a large well-established book publisher backed the aggressive plan, promising more than $7 million over five years.

But two years later, outside factors forced the investing publisher to suddenly pull out of the deal. B&L would have died right then, says Blanchard, except for the conservative financial plan that was still sitting on the shelf, gathering dust. Blanchard and his partner quickly switched gears—giving up their salaries, laying off staff and taking out credit lines on their homes. Today they are still following the parameters of their conservative plan, and their company is slowly growing again.

“If we didn’t have the other plan already put together, we couldn’t have developed it in time when we needed it. When disaster struck, we knew what we had to do,” Blanchard says wryly.

It’s enough to make you take the time to setup an alternate financial plan right at the start. I’m already sharpening my pencil.