Don’t be amazed by the millions of $$$ of startup funding

I hear more and more news about millions of $$$ and €€€ being pumped into startups I have never heard of. Each time I read such a piece I think “Oh boy, I could do so much with that money!”. But then the smart side of me kicks in and I realize I could barely live a year or two on that. Why? Because when you really think about it, the cost of running a startup with no profits is huge. Let’s count it.

Assume you have an idea for a startup. You can even assume you have a running demo you put up with your friend. Now, you want to go public, so you need money to keep going a year or two without decent profits. What your costs could be?

First of all, you need a Web Developer. If you are serious about the business, and want to develop fast, you probably need 2 or 3 of them. That’s $70K per year per developer, according to Salary.com. That’s $210K already. You could add a Project Manager to coordinate things and mark the direction of the development. That’s an easy $100K, $310K in total.

You definitely need an experienced System Administrator to keep your development environment usable, and your production server alive and snappy – nobody likes to visit a slow website, and a proper server configuration is a must. Hence we have another $70K. And if our service requires ad-hoc design, a Web Designer would set us $50K back.

Finally, we probably would need an Accountant, we don’t want to pay government fines, do we? Another $40K goes from our pocket. It also would be nice to give a salary to yourself and your friend, and since you started the business, $100K pre each seams reasonable. In total, that’s $670K in salaries alone.

If you add the maintenance costs for an office, servers, hosting, marketing and some unexpected events, you easily get a $1M a year. Taking into consideration that your team is actually just 9 people, including the Accountant, you can clearly see this is a really small business. Even $3M of funding would keep you up less than 3 years.

Now imagine you want the business to grow, hire new people etc. You will need analysts, marketing people, people who will manage the previous bunch etc. If you double the team after the first year, with the above funding you would be running low on cash by the end of the 2nd year. And how much funding would you need if you had significantly more employees?

According to CrunchBase, Twitter has 83 employees, and its last Series D funding was $100M. Before, they got $35M, $15M and $5M. Given their sophisticated real-time infrastructure, and bearing in mind that it looks like they spent all the previous funding, with the calculations we did here, it’s safe to say that the latest funding should keep them up a few years. But the numbers don’t look so amazing, do they?

I’m not an expert, but for a startup I’d suggest a couple of things. First of all, don’t hire like crazy – it’s not the size of the company that matters, but the market share and profits. Secondly, keep the infrastructure reasonable – it should work, not be another gadget for the house. Finally, think how you could minimize the cost of marketing, but not its effects – maybe go viral?

If you have your own experiences, share them in the comments. Thanks!

Headline photo by thinkpanama