How much money do you need to launch a startup?

By Vlad Shapiro.

The buzz-mantra of the startup world is that the only reason you should start a company is if you have intentions to change the world. However, as a student entrepreneur, I have all-too-often faced the discrepancy between my grandiose plans to disrupt XYZ industry and the real possibilities that could be achieved with the financing that is available to me. I know for a fact that I am not the only one who feels this way.

In my eyes, student entrepreneurs are a different animal than any other type of business people. I’ve often been told that university years are the best time to start a venture since the risks are low and time is abundant. Unfortunately, it is also during this time that finances are desperate, distractions are many and there is always some party to go to.  If I was to draw up the archetypal student entrepreneur, the description would look something like the following:

  • You have a new idea every couple of weeks with each planned venture exciting you more than the last
  • Minimal experience under the belt but the confidence of a self-made billionaire in your ability to take on the world
  • Minimal personal savings and parents who consider your entrepreneurship hobby to be a cute phase that will hopefully end soon so that you can get a real job. As a result, they are generally less than enthusiastic in sponsoring your business projects.
  • A couple of connections in the business world in the form of older, successful entrepreneurs whom you admire and who occasionally give you advice. In the back of your mind you also consider them as possible sources of future seed money.

With everything considered, you are forced to evaluate every one of your projects as an out-of-pocket expense (at least at the initial stages). While friends/parents/relatives are a potential source of investment, they are also an incredibly efficient ostracism machine in the case that your project flops and their money never comes back.

In the same way, your connections in the business world will most likely be hesitant to fund an inexperienced student. If they do and your project fails (which is a statistical certainty), coming back to them with another idea will be anything but easy.

Hence the logical next question is, what is the minimum amount of money you need to launch any sort of venture? Depending on the kind of business that you have in mind, the costs will vary but there are certain aspects without which your company will simply not be able to exist.

A google search for “minimum startup costs” will provide you with articles from sources such as Forbes and entrepreneur.com, ball-parking costs in the range of 20-30 thousand dollars. To almost any student, these numbers are astronomically high.

This is why I’ve decided to compile the ultimate bootstrap scenario for how much start-up capital a new venture will require.

As the business template I will include a personal venture of mine, Keener Notes, which purchases/compiles/redistributes exam-specific study guides. This type of business model is a classic example of low-margin, high-customer-volume type of venture.

As with most e-commerce or service businesses, fixed costs are minimal and financial success is largely dependent on consistent product quality and positive user experience. With that in mind, what are certain essentials without which your company will simply not take off the ground?

1. A respectable-looking website: This may simply be a well-designed landing page but it will be the face of your business. Paying a web-developer will put you out close to $1000 so I would highly suggest going the DIY route. It will take up time but the financial investments will be minimal. With that in mind there are two unavoidable expenses.

  1. Owning the space: you will need to purchase a domain name ($10-30) and website hosting (around $60 upfront for an entire year). I would highly recommend buying both services from a single source as you can talk your way into a discounted bundle deal. There are a number of options out there which are all more or less the same. Personally I prefer GoDaddy because they have good customer support and an intuitive interface.  With all these services, be skeptical of their constant push to upsell your package. Unless your business has very specific reasons to be concerned about privacy, security, or any other advanced feature that they offer, don’t hesitate to choose the most basic solution and ignore the rest. Cost: $90-100
  2. Creating the space: the next step is to build the actual landing page. Again, there are a ton of choices in this domain. The various template providers fluctuate in their designs and customizability. With all of them, there is a substantial difference between those templates that are free and those for which you have to pay. While there are exceptions, free templates generally have “cheap” written all over them and have close to no customizability. At the same time, paid themes often allow you to create a professional-looking website. Although I have my grievances with it, my personal choice has always been WordPress due to the large number of cool plugins that it provides and the relatively intuitive customer interface. Cost: $100-120

2. A company email: A small but important detail in your quest to legitimize your business. There are a number of free options but the best is Zoho Mail. While the service is free, be prepared to be patient during the setup process as you will have to integrate the address with your website host. In my experience it never works on the first try and you will have to be communicating with the relevant support teams. Cost: $0 

3. Client relations: There is a huge spectrum in the degree of automation amongst various payments systems. In an ideal world, your customers would select your product on your company website, transfer funds through an online payment terminal and have the product automatically shipped to them. The problem is that this kind of infrastructure requires thousands of dollars’ worth of fixed investment. The reality is that at the initial stages of your business, you will be doing almost everything manually: a labor-intensive but cheap approach. I have found that a good bootstrap tactic looks something like this:

  1. Spend time thinking about the logistics. Experiment with various processes to find the most efficient and professional way to communicate and receive payments from your customers. While seemingly petty, steps such as creating universal templates for letters, reducing the number of clicks for every transaction and setting up auto-responds on your company email will cumulatively reduce several hours a day in your operations. Cost: $0
  2. In terms of transferring funds, the free and most intuitive method is to setup e-transfers through a bank account. You can even attach your company email to an existing personal account, a step which may complicate the accounting but will save you expenses associated with a corporate account and a trip to the bank. As with other free solutions, the downfall of this approach is the need to manually accept/send payments. If done right however, my experience is that this process can be reduced to 6 clicks per transaction (30-45 seconds depending on the speed of your internet). Cost: $0

4. Legal stuff: A common mistake made by inexperienced entrepreneurs is the decision to consult a lawyer about their company. 9/10 times you will come out of such a meeting convinced that it is absolutely necessary to incorporate your company, do a substantial amount of paperwork and maybe even think about hiring council. The consequences of not doing so, you are told, can be grave. As someone who has made this mistake before, my advice would be to avoid this step and do the research on your own.

You should have very specific reasons to incorporate (for example liability concerns or tax benefits) and in the scenario that you decide to do so, doing it on your own should be fairly straightforward. It will take some time but will save you hundreds of dollars of legal fees and will teach you the ropes.  If you do decide to consult a lawyer, try very hard to either talk to a personal connection such as a family friend or a pro-bono service that is not interested in signing your business. Every city in Canada offers some form of free legal advice and while it may take a couple of tries to actually get a meeting, it is definitely worth it. If you are in Montreal, I would highly suggest the Dobson Legal Clinic.

Cost: $0-1200

All in all, not considering the expenses on your actual products/services (which are too diverse for every venture to be meaningfully incorporated into these calculations) starting a business from scratch and setting up the initial logistics will cost you as little as $100 dollars and can range up to around $1500. Forget about the 30k that Forbes claims that you will need. As a student entrepreneur, you can set up your retail logistics for the price of two week’s worth of beer money.  Of course, when/if your business operations expand, this infrastructure will by no means be sufficient. This setup will, however, allow you to do a thorough job of idea validation and customer discovery, hopefully allowing you to find your product-market fit with minimal financial risk.

In the end I want to leave you with a simple philosophical approach to starting ventures: take advantage of the resources available to you and substitute them for paid alternatives. As a student your resources are time and connections. Don’t be afraid to try to do everything yourself and ask for help from those around you. Do it right and you’ll see that this approach will reduce the investment that your project requires to a fraction of the initial estimate.

Dobson Chronicles

Dobson Chronicles

The Dobson Chronicles is the official blog of the McGill Dobson Centre for Entrepreneurship.