How much does a start-up really cost? | February 5, 2011
In 1884 Thomas Marks opened his first market stall in Leeds. Over the next few years he opened 20 other stalls around the UK. In 1894, Thomas Spencer invested in the business and retail chain Marks & Spencer was born. From it’s humble beginnings M&S—as it was colloquially called—became one of the UK’s biggest success stories and was the first retailer to make a pre-tax profit of over £1 billion. Companies like WH Smith, Woolworth’s and AMSTRAD all started the same way, so it would seem that in order to make it big, you should start small. Can the same thing be said of the Web?
As the founder of a relatively well known digital design consultancy I’m often approached by entrepreneurs wanting to start their own online business. I try to help them as much as I can, but I’m constantly amazed how little they know about the web or the cost of doing business online.
Starting your own online business has definitely got cheaper over the last few years. For instance you no longer need to buy expensive hardware or suffer crippling data costs. It’s also possible to piggy back off existing technologies and string together open source projects. Even so, setting up a company which you hope will become a multi-million dollar business isn’t cheap. As such you have to invest in proportion to what you hope to achieve.
I often see entrepreneurs lured by tales of plucky geeks starting their own business on a shoestring and making it big. Movies like Social Network don’t help quell the myth of the overnight success. The reality is somewhat different, with many of these so-called overnight successes spending 3 or 4 years in the wilderness and burning through hundreds of thousands—if not millions—of dollars before they make it big. More importantly, for every overnight success, we see tens of thousands of start-ups sink without trace.
Popular culture has created the myth that start-ups are cheap—cheaper than regular businesses anyway. This can be true for designers and developers who band together and use their own labour in the form of sweat equity. However if you don’t have the necessary skills and connections yourself, you have to hire in talent and that isn’t going to be cheap. Good products take time and effort after all.
A competent freelancer will typically cost you around £8k per month—a good agency staffer doubly so. With these rates in mind, an early prototype taking two people a couple of months could cost in the region of £30-60k. For a fully fleshed out beta version, you’d probably want a team of three or four people working on it over a four to six month period. Plugging those figures in you’re looking at anything from £100-350k before you’ve even launched. Suddenly this starts to feel less like a cottage industry and more like a real business.
Having spoken to several successful investors, these figures seem to stack up. It would seem that most investors expect it to cost around £50k to get your proof of concept and around £250k to get that product to market.
In 1978, John Mackey borrowed $45k from the bank to set up a small, natural health store called SaferWay. Two years later they merged with Clarksville Natural Grocery to form Whole Food Market. At 12,500 square foot and a staff of 19, their first store was larger than most health food shops at the time. The place was beautifully designed, the staff were knowledgeable and the quality was exceptionally high. By 1984 they had expanded to Houston, Dallas and New Orleans and continued to grow throughout the eighties and ninties. At the end of 2009 they owned 302 stores in 3 countries and were considered by many as the best grocery store of it’s kind.
The story of John Mackey in not dissimilar to that of Thomas Marks. Both started small and both rose to the heady heights of success. The main differences is that what counted for small back in 1884 was very different to what counted for small in 1980. The competition was stronger and peoples expectations had changed.
I try to explain to potential entrepreneurs that the amount you invest needs to be in proportion with your expectations. If you want to make a living wage then the digital equivalent of a market stall is just fine. However if you want to set up a national or even global business, you need to maximise your chances of success and invest accordingly. Good start-ups don’t come cheap so you need to spend as much on your digital business as would on it’s physical equivalent. It’s as simple as that!
Posted at February 5, 2011 2:42 PM