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University of Houston: How much does it cost to start a startup?

Is it a New Year's resolution to start your company? Here's what sort of dollar signs to factor in. Graphic byMiguel Tovar/University of Houston

The process of opening a small business is already stressful enough without even worrying about how to fund it. But it’s good to start thinking about business costs early in order to know where the money will go.

Sammi Caramela, a Business News Daily contributing writer, said in an article to “be realistic” when considering how much starting a business is going to cost. She mentions that things like office space, legal fees, payroll, business credit cards and other organizational expenses are all things that need to be taken into account before even starting.

Caramela offers five things that prospective business owners should do if they don’t know where to start when it comes to funding their company.

Keep a healthy skepticism

Caramela advises to not invest too much money too quickly. You should have a good level of skepticism to balance the optimism you have going into the process. The best thing to do is to is to “start small” and workshop your idea or product on a very small budget.

“If the test seems successful, then you can start planning your business based on what you learned,” Caramela said.

Don't underestimate expenses

Caramela goes on to note that “according to the U.S. Small Business Administration, most microbusinesses cost around $3,000 to start, while most home-based franchises cost $2,000 to $5,000.”

Obviously, every new business is different and will require different expenses. It’s estimated that a prospective entrepreneur will need about six months’ worth of their starting expenses once they open.

“When planning your costs, don’t underestimate the expenses, and remember that they can rise as the business grows…It’s easy to overlook costs when you’re thinking about the big picture, but you should be more precise when planning for your fixed expenses,” serial entrepreneur Drew Gerber told Caramela.

Don’t let your business fail just because you ran out of money. The excitement of starting a company can cause you to overestimate your revenue and underestimate costs.

Distinguish types of business costs

Caramela offers several examples of the type of costs that perspective business owners should consider.

One-time vs. ongoing costs

One-time costs are those that will only need to be paid once. These mostly occur at the beginning of the process. These expenses included things like incorporating a company and equipment purchases.

Ongoing costs are paid regularly, like utilities.

Essential vs. optional costs

“Essential costs are expenses that are absolutely necessary for the company’s growth and development. Optional purchases should be made only if the budget allows,” Caramela said.

Fixed vs. variable costs

Rent would be an example of a fixed expense because it stays the same from month to month. Variable expanses, however, “depend on the direct sale of products or services.” Expect fixed costs to consume most of the company’s revenue in the beginning. If the company grows and is successful, these fixed costs won’t make or break you.

The Most Common Expenses

Caramela composed a list of expenses new business owners will most likely experience.

  • Web hosting and other website costs
  • Rental space for an office
  • Office furniture
  • Labor
  • Basic supplies
  • Basic technology
  • Insurance, license or permit fees
  • Advertising or promotions
  • Business plan costs

She also provides examples and estimated costs.

ItemEstimated Cost
Rent$2,750
Website$2,000
Payroll$175,000
Advertising/Promo$5,000
Basic Office Supplies$80
Total (Annual)$184,830

Want more information? Here are 14 types of business startup costs to consider when launching your company from NerdWallet.

Estimate revenue

“Bill Brigham, director of the New York Small Business Development Center in Albany, advises new business owners to project their cash flows for at least the first three months of the business’s life. He said to add up not only fixed costs but also the estimated costs of goods and best- and worst-case revenues,” Caramela said.

If possible, it’s best to not borrow at all when starting a new business. “Borrowing puts a lot of pressure on any business” and it doesn’t allow for very much wiggle room in the finances.

Factor in funding

If you’re going to borrow, here are a few things you can do. “Personal savings, loans from family and friends, government and bank loans and government grants” are all sources of funding that potential business owners can utilize. Camarela said that most companies use a combination of several of these methods for funding.

Though self-funding is the best option, there’s also options like business credit cards and angel investors.

Caramela suggests to check out SCORE for trainings and workshops targeted toward small business owners and aspiring entrepreneurs. They also offer some counseling.

What's the big idea?

Starting a business is stressful in any case but now that you know how much money it’s actually going to take, don’t let lack of money stop you from making that next step and starting your business. Remember, skepticism is good but only if it’s a healthy amount. Now you know it’s an expensive process and the different types of funding you will need, but even if you aren’t able to fund it yourself, there are other options out there for you as long as your company is financially able to handle the commitment of borrowing.

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This article originally appeared on the University of Houston's The Big Idea. Cory Thaxton, the author of this piece, is the communications coordinator for The Division of Research.

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Building Houston

 
 

Here's your latest roundup of innovation news you may have missed. Photo via Getty Images

It's been a new month and a few Houston startup wrapped up November with news you may have missed.

In this roundup of short stories within Houston startups and tech, three Houston startups across health care, space, and sports tech have some news they announced recently.

Houston digital health company launches new collaboration

Koda Health has a new partner. Image via kodahealthcare.com

Houston-based Koda Health announced a new partnership with data analytics company, CareJourney.

"This collaboration will aim to develop benchmarking data for advance care planning and end-of-life metrics," the company wrote on LinkedIn. "Koda will provide clinical and practice-based expertise to guide the construction of toolkits, dashboards, and benchmarks that improve ACP programs and end-of-life outcomes."

Koda Health announced the partnership in November..

“Beyond the checkbox of a billing code or completed advance directive, it’s important to build and measure a process that promotes thoughtful planning among patients, their care team, and their loved ones,” says Desh Mohan, MD, Koda's chief medical officer, in the post.

CareJourney was founded in 2014 in Arlington, Virginia.

"I'm hopeful next-generation quality measures will honor the patient’s voice in defining what it means to deliver high quality care, and our commitment is to measure progress on that important endeavor," noted Aneesh Chopra, CareJourney's co-founder and president.

Sports tech startup raises $500,000 pre-seed investment

BeONE Sports has created a technology to enhance athletic training. Photo via beonesports.com

Houston-founded BeONE Sports, an athlete training technology company, announced last month that it closed an oversubscribed round of pre-seed funding. The company announced the raise on its social media pages that the round included $500,000 invested.

Earlier in November, BeONE Sports completed its participation in CodeLaunch DFW 2022. The company was one of six finalists in the program, which concluded with a pitch event on November 16.

Space tech company snags government contracts

Graphic via cognitive space.com

The U.S. Air Force has extended Houston-based Cognitive Space’s contract under a new TACFI, Tactical Funding Increase, award. According to the release, the contract "builds on Cognitive Space’s work to develop a tailored version of CNTIENT for AFRL to achieve ultimate responsiveness and optimized dynamic satellite scheduling via a cloud-based API.

The $1.2 million award follows a $1.5 million U.S. Air Force Small Business Innovation Research award that the company won in 2020 to integrate CNTIENT with commercial ground station providers in support of AFRL’s Hybrid Architecture Demonstration program.

“The TACFI award allows Cognitive Space to continue supporting AFRL’s vitally important HAD program to help deliver commercial space data to the warfighter,” says Guy de Carufel, the company’s founder and CEO, in the releasee. “CNTIENT’s tailored analytics platform will enable HAD and the GLUE platform to integrate modern statistical approaches to optimize mission planning, data collection, and latency estimation.”

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