You have a great idea for an app or digital product. You are confident it will transform your target industry and improve the lives of end users. But what will it cost to get it off the ground?
Calculating tech startup costs is a process dependent on your assumptions. Unexamined assumptions can put your business on pause before it even gets a chance to launch. We often talk to entrepreneurs that have not engaged with potential customers to confirm that what they are planning on building is something that the customers even want. Assuming that you have validated your assumptions, you should have a pretty good idea of the Minimum Viable Product (MVP) you need to build and the specific functions it should provide. For non-technical founders, the number of functions in the MVP and the choice of the service provider will inform the total capital required to start a business. For technical founders we recommend sticking with a very small MVP—after all, your time has value!
We have supported many companies through the early stages of ideation all the way to successful investor pitches and fundraising. Now we want to share with you the insights we’ve learned about how to calculate realistic startup costs.
How Much Does It Cost to Start a Small Business?
On the surface, the cost to start a small business can be as little as a few thousand dollars. Before spending money on the subscription or purchase costs of app development platforms, web hosting, and marketing management platforms, we recommend spending resources learning from your customers. Plan on drinking a lot of coffee! Once you choose to develop the MVP based on customer feedback, the sticker price of these necessary tech tools isn’t representative of the full cost to use them. There is always a learning curve, and as the founder, you may have technical skills to bootstrap the MVP into existence all on your own. But what about the value of your time? It’s a lot of work to do alone, and you should plan to pay yourself at least some salary to keep a sufficient supply of ramen noodles and coffee flowing.
Generally, the practice is for founders to only take on expenses when they are absolutely necessary. But since that definition will be different for every startup, the costs of professional support in areas like sales, marketing, or quality assurance may also be part of your early expenses.
What Are Examples of Startup Costs?
The US Small Business Association shares a broad list of startup costs examples, many of which are highly relevant to tech startups.
What Are Some Startup Costs for a Business In Tech?
- Subscriptions to cloud services such as email, website, CRM, collaboration tools, rapid prototyping tools, AWS or Azure
- Equipment like computers, software, smartphones, servers, and more.
- Utilities like Internet and electricity
- Office or Coworking Space including expenses to establish a home office.
- Insurance like errors and omissions policies, cyber liability, and employment practices liability.
- Market Research at multiple phases of development where you need to connect with and get feedback from your target audiences about your concept or product.
- Advertising and Marketing including a website, digital content creation, pay-per-click advertising, print ads, professional organization memberships, and more.
- Salaries for yourself and any vendors, independent contractors, or employees.
Accurately calculating the startup costs for your business allows you to request funding, attract investors, and get your product on the market. The US Small Business Association also provides a startup cost calculator worksheet you can use to estimate which expenses apply to you and which ones don’t. Silicon Valley Bank recommends estimating 18 months of expenses to get perspective on the total cost of your runway to launch.
How to Record Startup Expenses
Online bookkeeping platform Bench reports that two-thirds of founders use personal money to launch a startup. Whether you’re funding the venture yourself or have closed a pre-seed round with early investors, it’s to your benefit to record startup expenses. The IRS recognizes two categories of expenses:
- Investigation Costs include everything from wages and salaries to rent to advertising and market research. This category generally includes all the expenses associated with investigating the market fit of your business and launching the enterprise.
- Organizational Costs include the expenses to formally organize the business like incorporation fees, partnership filing fees, and legal or accounting fees.
Both these categories of costs are deductible, meaning you should record the expenses in a spreadsheet or tool like QuickBooks and keep track of the associated documentation for filing itemized deductions on your business taxes. Depending on the amount you spend, you may be able to deduct a portion of these expenses from your first year of business taxes or spread out the deductions over the next 15 years in a practice known as amortization.
There are also certain startup expenses that do not qualify to be deducted from business taxes. These include research or experimentation conducted before the business is legally formed, real estate taxes, costs of issuing stock, and the costs of transferring assets to the organization.
Get Support with Tech Startup Financials from NEXT Studios
NEXT Studios is a new type of venture studio established to help today’s entrepreneurs bring their ideas to market. This includes supporting founders at every step of the process from design thinking and prototyping to MVP development to releasing the product and pitching to investors. We want to help you take the next steps toward profitably launching your product or service—even if the next step is just the first step. Contact NEXT Studios to work with fellow entrepreneurs, launch your product, and move forward with confidence. We’re here for you.
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