Startup founders often underestimate the cost of building a company. And sometimes they’re being lied to by agencies who promise them fixed-cost quotes to build their software, making them feel like it’s all going to be clear and simple.
Unfortunately, the truth is more complicated...
1. Anyone who pretends they can tell you the total cost to build a software business is lying to you.
This is because...
a) The only way to initially succeed with a software business is iteratively. This means you release a version, you learn from customers, and then you iterate on the next version. This applies to both the software and the go-to-market strategy. You slowly find your way to product-market fit and growth.
b) Even when you find product-market fit and a healthy growth trajectory, competitors and other forces drive you to add features and capabilities over time (either to keep up with what everyone else is doing or to expand your offering and increase total addressable market - often both).
So, the truth is: The costs never end. Just like any other business.
2. It’s particularly difficult with startups because it often costs a lot of money up front to build a tech startup and takes a long time for revenue to outpace costs. It’s a big upfront investment, but then the growth curve and incremental cost to serve mean you’re eventually printing money. But until then, it feels like you’re burning money with no end in sight.
3. Points 1 and 2 are why tech startups often raise capital from outside investors. They need to support the upfront investment without panicking or making short-term decisions that limit proper product-market fit and growth.
4. Therefore, the real question for startup economics is: How much capital are you willing to invest in the startup, and how long are you willing to invest until the revenue curve blasts through the cost curve? What are the leading indicators along the way that the business is working?
To be clear, it’s unlikely that the money you can charge in the early days will come close to covering costs. If you try to charge big numbers for software transactions, you’ll do all the wrong things and almost guarantee failure.
5. The good news is that...
a. You can’t and shouldn’t wait until everything is perfect to start growing and even to start charging some money.
b. AI is making things a hell of a lot cheaper, and you can take advantage of that. You want people who have grown a young software startup from zero using scrappy and agile techniques (and AI).
c. You can develop a roadmap to try to estimate some of the time it’s going to take to build some of the most important features on your stack-ranked list. That will give you some semblance of when you’re going to cross key thresholds, but this will only be based on intuition and educated guesses. It will not give you hard data.
6. Being a startup founder is literally one of the hardest things you can do. Big risks and big rewards.