Founding a Startup: How Much Money Do You Need?

Starting a new business is an exciting venture, but it also requires careful financial planning and a clear understanding of startup costs. From securing initial funding to managing ongoing expenses, knowing how much money you need is crucial for the success of your startup. In this article, we explore the importance of understanding startup costs, the factors that influence them, and the various sources of funding available. By gaining insight into these areas, you’ll be better prepared to launch and sustain your startup effectively.

Understanding startup costs: why is it important?

Founding a startup company can be a cost-intensive process, and having a firm grasp over what to expect and how to prepare is key to the success of any new startup. Startup costs refer to all expenses a new business incurs to launch and operate until it becomes self-sustaining. These costs vary widely depending on the industry, business model, location, and scale. Knowing these costs is important for several reasons:

• Funding: The primary reason for projecting startup costs is to gain a clear understanding of required startup capital. This forms the basis of the startup’s funding strategy, whereby they need to determine where and how they will gather the startup capital they require (investors, lenders, grants, etc.). Having a clear financial plan is also essential for attracting potential investors or lenders.
• Risk mitigation: Detailed knowledge of startup costs helps entrepreneurs prepare for financial demands and avoid unforeseen expenses that could jeopardize the business.
• Strategic planning: Knowledge of costs helps in budgeting and prioritizing spending, potentially reducing or delaying non-essential expenses.
• Cash flow management: Predicting ongoing costs helps in managing monthly expenses in relation to incoming revenue. This is critical to the ongoing financial health of the startup, as it avoids situations of being unable to meet immediate obligations and short-term debts.

Main factors affecting startup costs

The cost of starting a new company can vary widely depending on numerous factors:

1. Minimum capital requirements for Swiss companies: the first important factor in the cost of founding a new startup is the statutory minimum capital requirements. If you opt to incorporate your startup as a limited liability company (GmbH), you are legally required to have at least CHF 20,000 in starting capital, all of which must be deposited (paid up). For a stock corporation (AG), the capital requirements are more burdensome at CHF 100,000, of which at least CHF 50,000 must be paid up. These therefore become the minimum amounts of capital you need before considering any other costs. Other legal forms, such as a sole proprietorship or general partnership have no minimum capital requirement.
2. Business model and industry: The type of business you plan to start, and its scale of operations has the most decisive impact on the amount of capital required. Depending on the nature of your startup, you may need anywhere from CHF 1,000 to CHF 100,000 to get it up and running. For example, if you are an individual freelancer looking to start your own online gig, your founding costs may be close to zero. On the other hand, an advanced tech startup may need significant investment in software development and hardware. Alternatively, a retail store’s major startup expenses would be inventory and physical space. Each type of business has different cost drivers and funding requirements.
3. Location: Costs can vary dramatically based on where the startup is established. Rent, utilities, and the cost of labor are typically higher in major urban centers compared to smaller towns or rural areas.
4. Human resources requirements: Salaries, benefits, and training for employees are major expenses. The cost will depend on the number of employees, their expertise, and the competitive nature of the labor market in the industry and region.
5. Legal and administrative fees: This includes costs for incorporating the business, obtaining necessary permits, and other legal fees. The administrative costs of founding a new startup in Switzerland are comparatively low and are primarily dependent on its legal form. The cost of entering a sole proprietorship with a turnover of more than CHF 100,000 into the Commercial Register is CHF 120, while the cost of registering an AG or GmbH is CHF 600. There may also be various other administrative and professional fees to consider such as trustee advice, notary fees, accounting and legal fees, the cost of setting up a physical or virtual office, and hiring employees or contractors.  Legal requirements such as licenses, permits, and the need to comply with cantonal and federal regulations can add to the legal costs, as well as fees for setting up the proper business structure and for intellectual property protection.
6. Marketing and branding: The marketing costs associated with promoting the startup and establishing a strong brand presence can be a significant driver of initial costs. These include marketing materials, advertising campaigns, and the development of a digital presence. The nature of these marketing campaigns and their associated costs also vary depending on the nature and size of the business. They are critical for attracting loyal customers, especially in the early stages of the business.
7. Research and development (R&D): For startups focusing on new and innovative products or services, R&D can be a major driver of startup costs. This might include product testing, prototype development, and market research.
8. Supply chain and inventory: For more product-based businesses, costs involved in securing a reliable supply chain and maintaining inventory levels can have a greater impact on the initial capital required.
9. Advisory services: Consulting fees for financial advisors, accountants, and business consultants can also contribute to startup costs but are crucial for setting up strong business foundations.

Common costs to consider in startup budgeting

We have discussed the main factors affecting the cost of setting up a startup. Here we provide a summary of some of the key expenses to consider when setting up your own startup. This list is by no means exhaustive but provides a useful starting point for thinking about the various cost categories to include in your own budgeting process. We have grouped the costs into four broad categories:

• Initial setup costs
• Ongoing operational expenses
• Marketing and customer acquisition costs
• Technology and infrastructure

Initial setup costs

• Investment in operating assets: Purchases of equipment, machinery, or technology necessary for operations.
• Land and buildings: Acquisition or rental of physical space for operations.
• Recruitment costs: Expenses related to hiring and training the initial workforce.
• Product development: Costs involved in research and development, prototype creation, and initial production runs.
• Legal and administrative fees: Costs for incorporating the business, obtaining necessary permits, and other legal fees.

Ongoing operational expenses

• Raw materials: Regular purchases required for production.
• Manufacturing: Costs associated with the production process, including labor and maintenance.
• Shipping costs: Expenses for distribution of products to customers.
• Salaries: Regular salary and wage payments to employees.
• Rent and utilities: Ongoing costs for occupying physical business premises.
• Other operational costs: Miscellaneous expenses such as insurance, office supplies, and travel.

Marketing and customer acquisition costs

• Advertising: Costs of digital and traditional marketing campaigns.
• Promotions: Special events, discounts, and other promotional tactics.
• Customer relationship management: Systems and software to manage customer interactions.

Technology and infrastructure

• Software development: Custom software solutions.
• Hardware: Computers, servers, and other technology infrastructure.
• IT support: Ongoing support and maintenance of IT systems.

How do you calculate your startup costs?

To ensure your startup’s financial stability and capital adequacy from the outset, accurately calculating your costs is essential. This involves several important steps and methods:

Tools and tips for financial planning

There are various tools and strategies you can utilize to create a robust financial plan:

• Software tools: Financial planning and management software such as Microsoft Dynamics 365 Business Central, SwisSalary, and Continia can automate many aspects of financial management, including expense tracking, payroll processing, and reporting.
• Spreadsheets: Advanced Excel spreadsheets can be used to create detailed financial models that forecast cash flows, income statements, and balance sheets. These models can be adjusted based on different business scenarios to see their financial impact. You may need the support of a financial planning expert to help you set up spreadsheets that work effectively for your business. Free simplified financial planning templates for startups can also be found online.
• Financial advisors: Consulting with financial advisors or accountants who specialize in startup finances can provide valuable insights and support, especially in tax planning, legal financial structures, and long-term financial planning.

Planned income statement and balance sheet

In constructing your startup’s detailed financial plan, two of the most important aspects are the projected income statement and balance sheet. These are essential for understanding the financial health of your startup and for determining your capital needs:

• Income statement: Also known as a profit and loss statement, it provides a summary of your company’s revenues, costs, and expenses over a period.
• Balance sheet: This statement provides a snapshot of the company’s assets, liabilities, and equity at a specific point in time and is vital for assessing the liquidity and financial stability of the business. The projected balance sheet also provides a good estimate of the initial investment outlay for operating assets such as equipment, machinery, vehicles, and technology.

Break-even analysis

Break-even analysis determines the point at which total revenues equal total costs, indicating no net loss or gain. In other words, it predicts when a startup can expect to start generating profit. This is crucial for planning your financing requirements, as it allows you to more accurately project the total cost of starting and maintaining your business before break-even isreached and the business can start sustaining itself from profits.

In addition, calculating the break-even point helps in setting realistic sales goals and pricing strategies, and provides a clear metric for monitoring business performance against financial objectives.

Where can you get the funding you need?

There are various ways to finance your own startup. It’s important to examine the different options available and make an informed decision based on your specific situation and goals. For a more detailed exploration of funding sources for startups and how to find the right investors, read our blog on the topic here.

Bootstrapping (own capital)

Bootstrapping refers to the self-funding approach, where you fund your startup using your own financial resources and the earnings from your business. This approach allows you to maintain complete control but may dampen your company’s growth due to the limited funds available.

Family and friends

You might consider borrowing money from your personal connections. This method is often less formal and more forgiving than traditional investment avenues. However, the risk is that if your business fails, it could strain your relationships. Despite these risks, this is frequently one of the earliest and sometimes only options for acquiring initial capital.

Angel investors and venture capital

As a common strategy for raising substantial capital, you can offer shares of your company to investors like business angels or venture capitalists. This can provide you with significant funding and valuable business insights, but you’ll have to give up some control over your company.

Loans

You might qualify for business loans from banks or financial institutions, which you’ll need to repay with interest. This option allows you to retain full control and ownership of your company. However, it can be challenging to secure these loans without an established business record or significant collateral.

Grants and state funding

You can explore grants and subsidies from the government and other private funding organizations that support entrepreneurship and innovation without requiring repayment. In Switzerland, these are available at both the cantonal and federal levels, with a variety of financing options and support programs. It’s wise to contact cantonal economic development offices to see what’s available in your area. Federal support includes loan guarantees, funds for environmentally innovative projects, and more.

Alternative funding methods

Besides the more traditional funding methods, you can consider alternative financing options. Convertible loans, for example, are loans that can be converted into equity during future financing rounds, offering a flexible solution. Another option is revenue-based financing, where repayment terms are tied to your company’s income.

Tips for managing your capital effectively

Having a thorough understanding of how much capital your startup needs and the best ways to procure it is a valuable step towards building a financially robust business. However, that is only one part of the challenging journey, and a theoretical understanding is certainly not enough on its own. The actual sustainability and growth of your startup hinges on the way in which you then practically manage your capital. Here are some strategies to help you manage your finances wisely:

Budgeting strategies

Managing your finances begins with creating and adhering to a detailed budget. Some key points to consider include:

• Realistic projections: Base your budget on realistic revenue and expense projections. Use historical data if available and consider industry benchmarks.
• Categorize expenses: Group your expenses into categories such as operational costs, marketing, R&D, human resources, etc. This helps in tracking and managing each category effectively.
• Regular reviews: Regularly review and adjust your budget to reflect actual performance and any changes in your business environment. This allows for timely corrective actions. The importance of this last point cannot be overemphasized as, all too often, new businesses treat their budget as a static thing which then becomes redundant with time. The budget is a dynamic tool for financial management which should always reflect the latest information available and the current circumstances of your business.

The importance of cash flow management

Unfortunately, due to inefficient liquidity planning, many startups that are profitable on paper still fail because they are unable to meet their cash flow requirements. Effective cash flow management ensures that your startup always has enough liquidity to meet its obligations. Here are some sound practices to follow:

• Monitor cash flow: Keep a close watch on your cash flow by regularly updating your cash flow statements. This helps in identifying potential cash shortages in advance.
• Manage receivables and payables: Implement efficient receivables management to ensure timely collection of payments. Negotiate favorable payment terms with suppliers to manage your payables.
• Maintain a cash reserve: Set aside a cash reserve to handle unexpected expenses or slow periods. This acts as a financial buffer and provides stability.

Use of startup profits: reinvestment vs. saving vs. distribution

Deciding how to use your startup’s profits has a major impact on your business’ success and long-term growth. There are primarily three ways to utilize profits:

1. Reinvestment: Reinvesting profits back into the business can fund growth initiatives such as expanding operations, entering new markets, or developing new products. This helps in driving long-term growth.
2. Saving: Building an accumulated profit reserve can provide financial security and help in managing cash flow during lean periods. It also prepares your business for future investments without relying on external funding.
3. Distribution: Distributing profits to shareholders can be an excellent incentive for investors and reward their trust in your business. However, it’s important to ensure that this doesn’t compromise the financial health and stability of your startup.