Is it really necessary to have a ton of money to start a business?

October 15, 2020 6:25 PM

I want to start a business one day. Perhaps, I'm just letting other people's fears and misconceptions influence me. I've always been of a mind that you don't necessarily need to have a ton of capital to start a business, especially in my field - - software engineering.

I've learned plenty about businesses and how they work for some time now. It has always been an interest of mine. Nonetheless, at times there have been people who have tried to poke holes in my plans out of spite.

I'm not talking about the people that are simply worried and who want to spare you hard times. Usually, that sort of person tells you the truth because they care.

However, I'd like to start a business without making huge unnecessary risks. At the end of the day I am willing to risk my money if necessary but I believe that it's doable without having to go to such lengths.

Does anyone have any insight on this matter? I'd like to hear differing opinions.

posted by Tarsonis10 to Work & Money (23 answers total)

Starting a business can be as easy as finding a friend who will pay you to do a task. It definitely doesn't need to be expensive at first. In my area there are successful home daycares, plumbers, handypeople, contractors, etc who don't even have websites, they just get work by word of mouth referral. So yes, it's totally possible if you start small. As you want to scale up, you'll want to spend more money, for instance for a logo, website, advertising, bookkeeper, etc, but you certainly don't have to do those things at first.
posted by nouvelle-personne at 6:29 PM on October 15, 2020 [2 favorites]

I recently released a product for sale on Steam after spending evenings and weekends working on it. I created an LLC, bought a domain name and some hosting, wrote the actual software, paid for various developer accounts, and did some other things necessary to start a small software business.

It's selling less well than I would have liked, but it is selling and has created a steady trickle of cash. According to the spreadsheet I keep, so far my cash expenditures on this project have been $794.27. I don't have any major expenditures on the horizon beyond a few hundred a year for tax preparation, LLC renewal, hosting, and a few similar expenses.

So yeah. For well under $1000 - plus your time - you can have a product selling on Steam and generating revenue.
posted by Hatashran at 6:45 PM on October 15, 2020 [8 favorites]

The $100 Startup by Chris Guillebeau
posted by saturdaymornings at 6:47 PM on October 15, 2020 [2 favorites]

Best answer: Certainly for something like software, which requires no warehouse or manufacturing equipment or additional headcount right away, you only need enough money to live on to start, plus maybe a small amount for professional web/email and a bit of marketing if applicable. And that might mean you can count on a spouse's income, inheritance/savings, day job, or an ability to bring in just enough money from the start - which may be feasible depending on the software you're engineering.
posted by Lyn Never at 6:51 PM on October 15, 2020 [5 favorites]

Best answer: My wife and I have talked about starting our own restaurant. That would require a substantial investment (and now is certainly not the right time to do it). So the answer to your question depends on the type of business you are thinking of starting.
posted by alex1965 at 7:02 PM on October 15, 2020 [2 favorites]

Regardless of the nature of the business you start, there will be a substantial investment of your time. You need to consider the associated opportunity cost.
posted by mr_roboto at 7:16 PM on October 15, 2020 [5 favorites]

Came to recommend The $100 Startup.
posted by kevinbelt at 7:36 PM on October 15, 2020 [1 favorite]

Software Engineering? Do you have development skills? Most developer freelancers I know create their own business when they start freelancing if only for tax reasons. Do the freelancing thing, do it well, and when you find yourself with more work than you yourself can do hire another developer, and another, and another... and next thing you know, you've started a business with employees and payroll and everything from scratch.
posted by cgg at 7:53 PM on October 15, 2020 [1 favorite]

Best answer: The business you're talking about is very different from a business that needs a storefront or a zoned physical location. Those are the businesses that bankrupt people just by trying to get permits in place. I bought a small duplex in San Francisco a few years ago with my civil engineer (now ex) husband. We were planning to add on two units, turn three into affordable housing, and use it as a test case for how to expand into more small-scale affordable housing projects. Buying the place was the easiest part of the process (LOL), because what followed was a three year boondoggle of permits, public hearings, surveys, inspections, design reviews, more public hearings, even more public hearings, aaaaand we're broke. We sold the property without ever getting to the point of doing anything structural and vowed never to try something like that again in San Francisco. The press is littered with similar stories of people who just wanted to open an ice cream shop, record store, print shop, legal aid center, on and on. In those lines of work, you really can be at a disadvantage in one jurisdiction and a tremendous advantage in another. So of course people are wary and cautious in their warnings! If you don't need square footage and real estate, though? The sky's the limit. I wish you the best of luck!
posted by late afternoon dreaming hotel at 8:13 PM on October 15, 2020 [5 favorites]

Quite a few years ago, I bought a bookstore. The owner was leaving to go have an adventure, previous potential buyers flaked. So she financed part of the sale, which was a huge help. I got good advice from the small Business Administration, bad advice from accountant #1. Accountant #2 was sketchy. Accountant #3 was a keeper. I guess the message of that is - get lots of qualified help and e willing to verify. At that time, the IRS helpline was notorious for giving bad information; that was problematic. I'm a woman and was young, banks were not an option for funding. I worked my ass off, had fun, made money more often than not, learned So Much, sold it profitably. Start now - read a lot, take a bookkeeping class, study marketing, learn some employment law basics.

You have to have a product that people want, make them aware of it, make a good product, get it to your customers, deal with so many unforeseen events (you just bought a bookstore, 6 new bookstores open in your area, no shit), and so much more. It's possible, it's a lot of work, planning and research make a very big difference.
posted by theora55 at 8:26 PM on October 15, 2020 [2 favorites]

It doesn't necessarily take a lot of money to create a software product but you need enough money to live on (or a day job that pays the bills while you write code at night) and enough money to market it to the point it's successful. There's only so much software a single person can write though. Once you get beyond what you can write yourself, then it gets expensive unless you have partners that are willing to work for equity. Or you're willing to roll the dice with outsourcing work to a low cost of living area, which can work out but you often get what you pay for.
posted by Candleman at 8:54 PM on October 15, 2020

Best answer: It doesn't necessarily take a lot of money to create a software product

Sure, I agree with this and as long as there's software there will be stories about people creating things in proverbial garages. To get anywhere you really need connections, like any other industry. Anything beyond doing something yourself, which is pretty much anything, will need either you or someone you know to have clients. Going to B2C? Great, you don't need connections but you need to buy your customers. PayPal famously paid people. Even if you're not paying people you're paying for servers to get metrics to either shop to advertisers or investors.

If you're not making a product but are consulting such as websites, maintaining legacy software or whatever you run into the networking problem.

Mobile apps and games are probably the easiest to get into from a capital ex perspective. You get direct revenue, the high ongoing costs of servers are largely taken care of my gated app stores and your operations are nothing as you're dealing with Apple or Google Pay, both of which automate all the billing you'd normally do. This also is the industry with notoriously razor thing margins and where you pump and dump games in hoping one will hit.

I think a lot of people underestimate the cost to acquire a sale, whether it is B2B or B2C. Developing is just an operational cost and is actually the easiest part of the entire project. A lot of people talk about how nice it is to have a technical founder but really I think that's a hindrance as being non-technical really makes you focus on what the core of the app is that is the value driver.

There's going to be a ton of counterpoints, but for a successful business I would look at a run-rate of at least $100k for 6 months. If you don't have that kind of money to burn in 6 months, I would say you're probably not in a place to start a business full time.
posted by geoff. at 9:18 PM on October 15, 2020 [2 favorites]

Response by poster: To be clear, the sort of business I'd like to get into is startups.

I definitely need connections and partners especially since I want to do this within finance. There's bound to be costs, I figure the biggest one will be servers. Although, knowing how there's a ton of permits and legal necessities with finance I can imagine that would cost me as well. However, I think I can keep it small at the start. I'd even be willing to work another job at first to finance everything.
posted by Tarsonis10 at 9:37 PM on October 15, 2020

Best answer: I figure the biggest one will be servers

Servers are both cheap and scalable thanks to the cloud. If your company is bleeding out because of server costs, you probably need to rethink your value proposition.

If you want to play in the financial space, you need to figure out what you can bring to the table that the really well funded Fintechs can't. They can clone almost anything that you can produce as a tiny software shop overnight, synergize with their existing products and marketing, and probably outlawyer you in any patent fights.
posted by Candleman at 10:59 PM on October 15, 2020 [3 favorites]

I'd even be willing to work another job at first to finance everything.

Get a job at another early-stage startup in the field. You'll get some connections, and you'll learn where the challenges are and what to expect.
posted by trig at 11:39 PM on October 15, 2020 [2 favorites]

Best answer: Servers are both cheap and scalable thanks to the cloud. If your company is bleeding out because of server costs, you probably need to rethink your value proposition.

That's not necessarily true anymore. Server costs are cheap for a certain domain of problems like scaling up transactional websites, or peak and trough traffic patterns.

If they are in finance and doing ML or anything requiring GPU it is a significant cost, there's a reason that cpp is used heavily in the industry. Scaling isn't that hard, but it doesn't mean it isn't expensive.

Finance is going to be a very difficult industry to break into because of the high client acquisition cost, or cost to make that first sale. I would look at another "startup" and even those will be difficult to get into it. Really the route for startups in this industry are going to be successful people at a large Wall Street bank and/or post-docs from top schools. There's probably a high correlation between the two. Good luck, this is an incredibly hard industry to get into as an outsider.

As a side note, I would ignore a lot of what people say about startups. There's a Silicon Valley set that still has this mentality that startups are college kids eating noodles and working crazy hours. I think that literally might just be Y Combinator at this point but they're the most vocal. I saw a lot of pitches that were a couple of guys that met in a dorm room, but failed to mention that was at Stanford and that they went to work for Blackrock for several years after that and had several million in Pre-A Series Funding from big names you've probably heard of. That's why I use the term startup in quotes as it is rarely a kid committing code and running the floppy disk to a friend's house.

Not finance, but a similar entrenched industry. Expect a large uphill battle, expect to not be taken seriously even with a proven product. Don't expect that to be obvious, you'll get a lot of people who will tell you the product is great and leads that don't go anywhere. So it'll always seem hopeful. I don't mean to be pessimistic and you'll hear this again but I would focus completely on defining the product, asking people who'll use it what they want, getting feedback and basically selling nothing. Without connections, investors more or less want to see you generating revenue.

Feel free to contact me, I just went through this. I don't have specific advice in your industry but I might be able to help.
posted by geoff. at 12:00 AM on October 16, 2020 [3 favorites]

Best answer: Depending on your market, insurance can be a thing - I'm just starting a new business and insurance is the main hurdle (as $10k annum) as I dont have clients signed yet.

A relationship with an accountant and a lawyer are essential in most businesses, and sometimes a specialist insurance agent.

Take theora's advice and learn some book-keeping, also IMO arrange an overdraft (to avoid soaking up your own money), I didn't do this initially and it was a mistake.

There's a book "How to be a Graphic Designer, Without Losing Your Soul by Adrian Shaughnessy" I'm not a graphic designer but I learned more from that book than any business book. Covers all the stuff other than the actual time that you are earning.

Also, other people. Will you work alone or plan for others at some point? My goal for instance is to work as alone as possible, but it can be a limit on income.
posted by unearthed at 12:11 AM on October 16, 2020 [2 favorites]

You don't need a ton of money to start a software business, but you do need to think about how it's going to scale. Your major expense is going to be people - two points that have been challenging in my experience and you need to think about:

* How do you attract the caliber of people you need once you're past the do-everything-yourself stage? You need to be able to pay a competitive wage. Competent and experienced people very likely already have a decent job and they won't leave it to come help you without some incentive.

* If you are looking at B2B clients, you are also going to need non-dev resources: both junior people to do support and hand-holding and somebody senior that could, say, do a project management meeting with a client or you're stuck doing all of that yourself.
posted by each day we work at 12:22 AM on October 16, 2020

This is outside my field, but I would expect that rules and regulations around fintech would vary by country. It seems from your AskMe history like you have a bit of wanderlust (that’s great! If very inconvenient in 2020). I would suggest learning about the regulatory environment for the work you want to do in the country you want to do it in. My suspicion is there could be some hidden costs here for things like lawyers.

Maybe this is a dumb question, but do you have work experience in fintech? I would expect you’ll have an easier time starting out on your own if you have worked with others first, so you can learn the norms of the field, which tools are industry standard ones you should be using to be credible, which ideas of yours are likely to be so new that you need to shut your mouth and apply for a patent. That may also help you have a better sense of where your field’s hidden costs for a new business will be.
posted by eirias at 3:54 AM on October 16, 2020

Look for "I will teach you to be rich" by Ramit Sethi. He also has a program to help get personal businesses off the ground.
posted by notsnot at 7:54 AM on October 16, 2020 [3 favorites]

I have a friend who started a company doing mostly medical software with no serious start up capital. He's still around 20 years later.

Building an app (if you do a good one) is a pretty cheap way to startup with low up-front costs.
posted by The_Vegetables at 8:05 AM on October 16, 2020

Came in to recommend Ramit Sethi's courses, as well as the book Rework, which is by Basecamp's founders who bootstrapped their software business.
posted by chiefthe at 10:22 AM on October 16, 2020

Best answer: A start-up is not a business, it is a structure or stage for the business. The risks and capital needed depend so much on the particular area where you are competing. In finance, is this something that you can sell as an app to consumers? Or small businesses? Or Fortune 500 business? Or banks themselves?

Each has a different profile for what it takes to market and then support the product - advertising? a dedicated sales? And what kind of customer support is required? An email when you get around to it? A 8-5 workday text/email support? A 24/7 hotline? Similarly, what happens if there is a bug and what does that mean for your quality control and beta test needs?

Some of this feeds into the question of how much investment do you need to make before you have sales - in terms of hiring people and facilities, in terms of regulator approvals, in terms of developing all of the support structure your product needs (marketing materials, user doc and training materials, customer service, maybe packaging and manufacturing) as well as product development.

You also need to a reality check about a customer is willing to pay for a product, what you actually receive (do you pay 30% to an app store) and the money you need to make to be viable (recognizing that it is so very hard to guess what sales might be) Then check that price in terms of the value proposition for the customer - taking into account both the next best alternative and the risk of buying from an unproven company.

What I'm really saying is that you need to do some real thinking about your business plan before you can understand the risk that you are taking on for the particular product you have in mind.
posted by metahawk at 12:33 PM on October 16, 2020