Startup Lessons: How Much Does it Cost to Launch a Startup?

Let's say you have an idea for a startup -- it could be an app, a service, maybe some kind of item you want to sell. So, how much does it cost to get the business up and running? That’s the question that keeps a lot of people from making their idea a reality. They have no clue how to calculate the financial risk they’re about to take.

First off, you can't put all startups in one bucket. A simple app will have different startup costs than developing a new way to harness energy. But I can share a few sample cases I've seen either firsthand, through fellow entrepreneurs or venture capitalists, and through my company, Coplex, a startup studio that works exclusively with founders to prove, build, and iterate their startups.

The typical startup costs can be broken down by the difference phases of the business:

1. Validation/Prototype & MVP Phase

You have an idea and you want to see if it's viable. You may believe it’s great, but you're smart enough to know that, as ambitious as you are, your assumptions may be off. This is the phase where your startup takes shape. The general idea stays, but the way it’s executed is shaped by how people respond to your early prototype.

During this phase, you don't need to build the full product. The idea is to get an MVP, or a minimum viable product. You don't need a perfect logo or a perfect name. Every function of your app or service doesn’t need to roll out at launch. You don't need a full line of products. You need the bare minimum -- something to prove your idea has demand and viability.

You do this through several phases, from building landing pages and ads to validate the concept, to basic versions of an app, to a simple cookie-cutter store or website. You then begin to market it through paid campaigns, drive some users to it, and see how they behave. Do they drop off? Do they keep going? And you build on it.

So, what are the costs? And how do you execute it?

For nearly free (cash-wise): Get a friend or a couple friends to do it for equity. Find a business partner who can design and code to believe in your idea. Have them build it out. Test by spending some money on some Facebook ads. Drive potential users to what you build along the way and see if it sticks.

The risk here is, if you haven't done this before, you’ll likely end up building something people won’t use. You need to know lean startup principles, how to execute quick validation steps and other critical tactics during the early stage of a startup to prove your idea. You may get lucky and pull it off, but remember, creating a successful company is 40 percent execution, 40 percent timing, 19 percent luck, and one percent the idea.

In other words, your idea isn't what's valuable here. Why something succeeds or fails relies on your ability to properly execute it, the timing of that type of business against the current market and demand, and pure luck.

For around $50,000: You're a good entrepreneur, you have a great idea, and you put together $50,000 from yourself, friends, family, or maybe an angel investor or two. A startup studio will take your idea through some customer development steps and help get you an MVP.

You'll likely have a full team consisting of strategy, product management (to guide you through the lean startup process), designers, developers, and growth marketers (to help bring real people to what you build). In this period, you should be able to go from idea to revenue, which in turn proves you're on the right path.

But even if it’s executed correctly, most MVPs don’t win on the first release. It’s only the first in your series of experiments to get to product/market fit. The key at this step is to listen to your customers and watch the data of how people are (or are not) consuming your MVP. In most cases, you’ll learn there are some adjustments that need to be made after a faulty assumption and you’ll need to iterate by testing something different in the product or the market itself.

In some rare cases, you will find out something that completely invalidates the concept and then you’re out $50,000. It’s unexpected and unfortunate, but it does happen. Most of my experience, however, has shown that an entrepreneur who is able to put together the money is smart enough and resourceful enough to bring something to the table that works. After all, getting people to invest into your idea already has a level of validation that you're on to something.

2. Product/Market Fit Phase

Once you've iterated a few times on your MVP, you now need to turn it into a real business. This phase is tougher to price, as this can heavily depend on the actual business you need to build.

This is the phase where you need to see if your business can grow and scale. Is the market big enough? Is this a multi-million dollar company, or did the idea simply work with a niche, small audience?

At this point, you're likely going to raise some outside funding -- what's often called a seed round. This is where you take something proven, with actual data that shows the business has legs, and bring in investors to back your idea. Often, you raise something between $200,000 and $500,000. I recommend only raising money once you’ve already launched and proven some traction. Raising outside funding on an idea is highly unlikely, unless you have a hell of a track record.

During this phase, you will set clear KPIs (key performance indicator goals) on what your business needs to achieve to be able to sustain itself. The options are usually either plan to raise more money in the future, or becoming profitable -- the first being the more likely, as focusing on profitability too early can impede growth.

You'll then need to execute against those KPIs. You should continue iterating and testing based on the lean startup principles. Never build out full features; always build a little, see how the market reacts, and learn from the results.

So, how do you build it?

There are two options here:

Build out your own team. This is where you bring in partners, hire consultants/contractors, or full-time employees. Depending on the skillsets you already have, you'll need different people. Overall, you'll need at least one person for each of these responsibilities: product management, design, development, growth marketing, data and analytics, and sales and business development.

The risk is you may hire the wrong people. The reward is it's your team, your family. They are fully sold on your business and idea, and you'll get some sweat equity out of them. And passion is a tough thing to outsource.

Use an outside team. Again, you can hire a startup studio, like we offer at Coplex, to iterate on your proven business and help you find product/market fit, hopefully at scale.

The possible downside here is that no one will be as passionate about the company as you, your partners, or even your early employees. Don't expect midnight phone calls on ideas or Sunday night development sessions. After all, they don't have any equity in your business.

The upside, however, is you get a full team who’s done it successfully in the past. You don't need to worry about hiring the wrong or inexperienced employees.

The cost of either depends on time. For example, be prepared to spend at least $100,000 if going with a startup studio -- likely more -- as it will take time to find great product market fit for your startup. And the cost of a full time team, depends on how many people you bring on. Ten full time employees can easily cost 100k+ a month

So the big question is: which route would you take with your startup costs?

Ilya Pozin is a serial entrepreneur, writer and investor. He is the founder of Pluto TV, Coplex, and Open Me (acquired by Rowl). Named one of Inc.’s ‘30 Under 30’ entrepreneurs, Ilya also has columns appearing on Forbes and LinkedIn. You can keep up with Ilya on Twitter.