Costs of a tech startup

I won’t sit here and tell you all the various costs down to the last cent, that would be impossible. What I will do is tell you what to expect and where some of them might come from, this can be most confusing when you don’t have the technical experience. It will also help you a little bit when you are talking to your development team, as you can have a rough idea of what things should cost.

Development team

As I’ve discussed in previous articles this will depend on what option you take. As a quick reminder, there are three: agency/consultancy, contractor/freelancer and employees. This should also be the order of how much it will cost you. An agency or consultancy will charge what a contractor would plus a little bit. A contractor will charge between 2 and 3 times what an employee will cost and an employee should cost the least even when you take into account all of their benefits, you can also give them equity in the company to potentially work for a reduced rate. No matter what path you choose, the development team will be your biggest cost, there's no real way around it. Each developer you hire will cost you anywhere from $60k to $400k depending on their seniority, the technology the company is using and the prestige of the agency. This makes it vital that you don’t hire more than you need yet you still need to get it completed. So how many should you hire? Well, you probably need one designer for a few months to get your designs in order and between 1 and 2 frontend developers (people who make the visual side of the application) and 1 and 2 backend developers (people who make the logic and store the information used by your customers). This team size depends on how much funding you have and how senior they are. The more senior they are the more the cost but the less guidance they need and the faster they can output code. Ideally, you want as many developers as you need to get your first version out to market in 6 months, so planning a runway for 12 months of development is a great idea. However, if you think it will take longer than 6 months to make any money then you should plan to have more than 12 months worth of funds to pay them.

Hosting costs

When you’ve never been apart of a software team you won’t know or have worked with what we call deployment. This is where you put the code needed to bring your idea to life. Your developers will write it but they have to put it somewhere for the outside world to get to it. If it's a mobile app you will have to push it to Google and Apple, at least the frontend. The backend or the logic of the application will have to then be hosted somewhere that the frontend can talk to, this is where your users will store their information. There are a million and one different ways to host your backend and for the most part, it depends on the technology you’re using but you can easily get away with a free option until your either close to release or in fact in production. Often the free tier of these platforms allows you to do a lot, which is great because you can get something into the market for extremely cheap. You really shouldn’t be paying more than $100 a month for hosting in 2019, at least when you first start and I'd say you shouldn't be paying anything unless you have customers. For your testing purposes which you will need you shouldn’t be paying anything either, not until your established.

The code you’re paying for will need to be hosted as well, this is very different to the hosting I was just talking about because that hosting is in regards to the code your customers will interact with. This hosting is all the code your developers ever write, two very different things so let me tell you how. When your developers write some code they need to share it with the rest of the team, they could just send it to one another but this would quickly cause issues if one person was to work on something in the same area as the other, it would become a race condition for who finishes first because the other persons get overridden. This is overcome with versioning software, I won't get into the details but essentially it allows you to have multiple people all working on the code base as the same time and not overwrite other peoples work. It also allows your codebase to have a history so that you can go backward in time to working versions if someone breaks it all. The software itself is free but the hosting of the software is not, well sort of. If you have a small team it is as all these places also have free tiers but if you have more than 4 or 5 developers it becomes paid which can usually cost you between 5-10 dollars per developer. This is only a small expense but it's one to keep in mind.

Software

There will be various software that you need, you need somewhere for a designer to put their designs, you need this and that and soon enough you have a million things your paying for. Try and keep the amount of additional software to a minimum as this will greatly reduce your expenses, and for the most part, you won't get enough use out of them as such a small company. I won't talk too much on this topic as it could get very long and it's quite specific to your companies needs but I’d suggest getting something like the google cloud suite so that everyone has an email and call the office tools to get their work done. You will also need to factor in things such as a company website and the domain names for your company. These both won’t be too expensive and you can use a company such as Squarespace which offer amazing websites that you can easily put together yourself.

Equipment

You will need to supply a laptop to all your developers unless you feel comfortable with them using their one which is entirely up to you but they will expect one so be prepared to pay a few thousand dollars for each one. It's pretty standard practice to get a 15 inch MacBook Pro for each developer which is quite pricey. If you want the most out of each developer you need to get them an external monitor and the bits and bobs they need to get it set up. I’d suggest for each developer a Mac, keyboard and mouse, monitor and a dongle to connect it all. This way you can get the most out of them.

Office space

This will be the second-biggest expense after employees. I'd recommend something in a location that is central to where most people live in your city or town to make it easier for travel as well as somewhere that won’t break the bank. The closer you are to the CBD of your city, the more expensive it will become but if you can afford it, that's probably where you want to be. Renting offices in coworking places is also a great idea as these places have fantastic resources such as beer on tap on Friday, 24/7 access, Gyms, table tennis tables, amazing coffee machines. They have pretty much everything you can think of at these places, however, they are expensive and you have to pay per desk so it can rapidly get expensive. On the flip side if you want a cheaper office, often you can find places that are one or two suburbs out from the CBD that can be a third of the price and bigger. It simply comes down to can you afford it and do you need a big office. Try and spend as little as possible on an office, just don't go too far and make it a place that no one wants to come too.

Marketing

This should always be factored into your budget, the last thing you want to do is get to the end of your development and find out you don’t have any money left, so you can’t afford any advertising. Then no one will know about your product. You need to keep a large amount for advertising as a percentage I can’t give you a definitive answer, but it shouldn’t be anything small. You shouldn’t be spending anything less than 10% of your entire budget on marketing. Think about it this way, if you got $1 million of funding, that's a large development team, you should be factoring in at least $100k for marketing. You can’t possibly attract customers if no one knows you even exist. There are plenty of ways to get free advertising such as posting on your social media, sharing it with friends but you won’t beat spending money on proper digital marketing, the most effective being that of social media sites. Facebook, Twitter, Snapchat, Instagram are all the places you can set up daily budgets, put your parameters in for your target customers are and then their software will work out how much it will cost you and stop once it's hit the daily budget. This is a fantastic way to get it to people that actually might use your product. You leverage the data collection of these platforms to find and show people that match your ideal customer “Hey we exist and we are new, come check us out”. I can not stress this enough, the marketing budget is just as important as the development budget, sure you don’t have to spend as much but you need it, all the same, so don’t skimp on it, and don’t waste it on TV or radio those mediums are dead.

Costs, costs, costs

These are only some of the expenses that you will face when trying to get your idea into the market. Yet they are the biggest and the most common, you will have many more than this but if you can go in with the philosophy from the book “The lean startup” trying to get to market as cheaply as possible you will be okay. You need to spend money where it's important such as your designs and your developers but spend less on your office and parties. It's all a numbers game, the more you can save the longer you can keep going for and the closer you get to making a successful business.