Sooo, Your Thinking of Starting a Startup?

One of the most important questions that aspiring startup entrepreneurs should ask themselves before they put their idea on paper and send it out to investors is “How much money do I need?” This may seem like a simple question, but there are many different types of startups that have very distinct cash needs.

First, let’s break down why a startup would exist in the first place. For some people, it could be because they have a great idea and think they can sell customers on it. For others, they might want to go into business with their friends or family members. However, many startups fail because the founders did not understand what it actually takes to run a company from day-to-day — nor how expensive this process will be. To cover the basics, a startup usually needs money for:

1. Hiring employees and paying them competitive wages (until profitability kicks in)

2. Marketing and advertising campaigns (can be expensive and not always successful)

3. Starting an office (locations can range from free( this is very rare)to $300+ per square foot — depending on size and location)

4. Additional “office” necessities such as furniture, electronics, etc. (again, these costs vary greatly; however, they all add up)

5. Health insurance for said employees (this is NOT cheap by any means)

That’s just the tip of the iceberg. Other important questions that should run through your mind include: How much money do I need before I start seeking investors? How long will it take me to build a prototype of my product? What’s the minimum amount of money I need in order to make a dent in the market?

Raising Funds

Raising money for your startup is no easy task. Whether you want to go out and get an investor or look into multiple bank loans, it can be a grueling process that requires you to pay attention to every minute detail — from past financial statements and projected budgets all the way down to what you plan on naming your company. A word of advice: don’t rush into finding an investor before you have thoroughly considered the full scope of expenses that come with running a business. There are many different types of startups and they all require varying levels of funding upfront. The key is to find the right balance between how much you need and what you can realistically get. The smallest detail could be the difference between a successful venture and one that fails before it even gets off the ground.

To take this idea a little bit further, let’s say we have two entrepreneurs who want to start a business based on creating lawn care services in their local community. They both know the cost of setting up shop, advertising, paying employees, and other miscellaneous costs that startup companies incur — but they don’t necessarily know how long it will take them to become profitable. One entrepreneur decides he would like to seek $50,000 from investors to fund 50% of his business (with an expected 1:1 return on investment), while the other entrepreneur wants to start out with a loan from the bank of $100,000. The first entrepreneur thinks his company will be profitable by the second quarter of year one and recoup all initial costs within five years, while the second entrepreneur expects to pay back all loans within six months after launch if everything goes as planned.

The first set of numbers shows that the company funded by investors only needs $50k to get up and running — which is really not too bad considering their expected return on investment (ROI). However, some things need to be taken into consideration:

1. Whether or not this investor is looking for partial or full ownership in your startup and
2. What specific terms they may have for giving you money (i.e. they usually ask for a higher ROI in return for more risk).

Whether or not the investor is interested is something you can’t control — but if this company wants to be sustainable in the long run, their expected ROI is going to have to be fairly high compared to other options. For example, let’s say they expect a 30% increase on their initial investment every year (which isn’t unreasonable by any means) and that they need a minimum of $50k before they will give up equity in their company. That still only covers half of the startup expenses and doesn’t leave them with much room to grow. On top of that, there are many risks involved with accepting outside money because it results in losing complete ownership over your business. If this company doesn’t perform as well as they expected in the market, meeting investor demand may be difficult at best.

The second set of numbers shows that the bank-funded company only needs $100k to start — which is definitely preferable since it doesn’t require giving up partial ownership of your company in return for outside capital. However, there are some things that need to be taken into consideration here too:

1. Whether or not the loan will include additional interest over time
2. How long do you plan on keeping said loan (some allot a maximum number of years before repayment is required)?.

On top of that, keep in mind that if certain conditions aren’t met by this company, they lose their initial investment or have to pay back interest on top of the loaned amount. Even though this company doesn’t have to worry about giving up equity in their company, they still need to be able to meet the demands of their investors/lenders or they will be in shambles come time for repayment. If that’s not possible then the bank could seize all assets owned by the business — that means any property, equipment, etc. So while this route seems more appealing on paper, it really just depends on what kind of business you’re running and how much money it requires for you to stay afloat.

Which One Is The Answer?

If I had to choose between these two options (which is an unfair advantage since I am not an investor nor a lender), my money would go toward the bank-funded company. While this route does require taking on more responsibility, it also has the potential for less risk than if I chose to take outside money. I would rather not give up equity of my company unless I am sure that they want to invest in my startup — and if they do decide to invest, then at least there will be a significantly smaller chance that all their money is lost when the time comes for repayment.

More Questions That Need Answering

If you’re interested in starting a business, then there are some things you need to consider before launching your endeavor:

1. What kind of product or service will your company provide?
2. Where do you plan on doing business?
3. Can your business sustain itself financially without outside investment/credit?
4. How do you plan on overcoming the competition?
5. What is your expected ROI, and
6. What are the risks involved with accepting outside money? Keep in mind that all of these things are important to consider because for every success story there are a countless number of failed startups.

If you’re not interested in starting a company, then at least think about how much more prepared you would be if you had some knowledge on the matter.

Ready to Start a Startup?

As always, thanks for reading! I hope this article provided some insight on what kind of choices people have when they first start their own business. If you have any more questions about this topic or just want more information on anything else related to starting a business, please don’t hesitate to leave it in the comments