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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..

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Remember that not all startups are web-based "virtual" companies. there are companies making new batteries, cutting edge alternative fuels, medical devices, drugs. There are restaurants and bakeries, hair salons and Pier One franchises. In fact, I would propose -- the overwhelming majority of startups are not "virtual web-based companies" and they still all new good financing. – Joseph Barisonzi Apr 6 '11 at 17:17
That's a good point, but I also understand that. It's not as mind boggling for companies that need to manufacture, distribute, etc etc. My questions is more about the foursquares of this world. – aslyesnow Apr 7 '11 at 22:37
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@aslyesnow: you need to work on your accept rate. Look back at some of your older questions and click the check by the best answer. It helps close out questions that have been answered and is a nice courtesy to those that provided the answer. – BMitch Jul 25 '11 at 1:55
@Bmitch - your accept rate is 0% as well... – TimJ♦ Jul 25 '11 at 3:23
@Tim: yup, for one partially answered question. The only answer with an upvote was voted up by me. The answer was good, but I was left even more confused about the whole thing. – BMitch Jul 25 '11 at 11:29

1 Answer

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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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Wow, I guess the wages do add up easy. I'm glad you didn't get it in the beggining either :) Can I ask- how many people did you have in the very beggining? – aslyesnow Apr 6 '11 at 5:50
There were 4 of us and the first year, we were still at Uni, we earn't about $15K-$20K each ... we've improved a little since then :) – Robin Vessey Apr 6 '11 at 7:45
Unless you're paying a company in China to build actual physical goods, labor will be the number one cost to a startup. Developers don't come cheap these days :) – Gennadiy Apr 6 '11 at 11:31
Yeah thats why we started the venture development side of the business, its cheaper for a lot of startups to work with an seasoned company than take the risk on random unknown devs ... if they have some backing we can usually make it stretch further and get them to market in the time it takes them to find the developers (let alone set them up, work out the rules, organise the automated builds and everything else). – Robin Vessey Apr 6 '11 at 11:35
A much needed answer to a lot of Entrepreneurs, I have heard the same question repeat 100s of Times, And then a follow on question, Once you got it going for 2 Yrs say, when do you see the incoming $$, and Whats the normal ROI for the sunken costs... – Shree Mandadi Apr 6 '11 at 12:54
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