Q & A

Aslyes asks “Why do startups need so much money?”

What are startups raising millions of dollars for? I know running a website can get costly, but seriously, millions? I just don’t get it. And if you say advertising, I still don’t get it, because the only recent startups I’ve seen ads for are Groupon and LivingSocial. I feel like the majority don’t advertise.

Hiring people? At what point do they need to hire that many more people?

Again… just wondering..

My Answer

I never used to think it would cost that much either … but then I started to grow the company.

Each salary has to be paid for 2 years, then have 30% on costs per person on average.
So you have

  • 3 good developers – $80-100K each. Say $300,000 per year.
  • 1 marketing person = $150K
  • 2 sales – $100K each = $200K
  • 2 support people answer questions and fixing things – $60K = $120K
  • CEO $120K

= $890K in raw wages per year x 30% for on costs x 2 years approx $2.3M for a small team.

  • Then you have hosting costs, advertising, and travel costs. It ramps up really quickly.
  • Servers, programming tools, processes and systems, rent on a building to put them all in.
  • Then you do promotions and trade shows ($40K per show minimum) 3 of those per year
  • Then if you make it big and have to scale, you end up with full time PR people, full time web maintenance and performance tuners, HR people, inductions and … it goes on

And what if you’re wrong and half way through the 2 years you have to pivot and do something else…?

Then each specific business has its own unique issues and troubles, they all cost.

… I have 8 developers, 1 key sales, 2 support and me in 2 companies … we sell through Australia, New Zealand, Canada and the US … $1M goes out the door pretty quickly each year.

The CEO needs to have enough money to spend in order to build. If they are always paused waiting for the next dollar they may not get the momentum they need.

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