How to Budget Your Startup So You Don’t Run Out Of Money
Expert advice (for free) on the do’s and don’ts of product launch budgeting before you break the bank.
PHOTO CREDIT: Getty Images
So many startups are so eager to throw money into anything they believe will speed up the launch process. More seasoned experts know that intellectual property, patents, trademarks, copyrights, content, and products, should all be assets that hold value, rather than sinkholes. You need to have an investment plan for all of this. That means every single spending point along the way should be detailed in your investment plan and budget. The problem with this is that, unless you are spending thousands on an expert, which you probably cannot afford in the beginning, who knows how much you should budget for things like patents, marketing, prototyping, research and design? This is what we are going to break down today.
Scrounging and Spending: Why? What? When?
The first thing you need to be able to determine is whether or not an item is an asset or a liability, so you can learn when to scrounge, and when to spend, and when you are spending, how much you should be dropping. Remember, when discerning between the two, assets always add value, liabilities oftentimes eat up resources without adding value back in.
The Importance of Research and Design
It is no secret that startups who spend on research and design, especially forward-thinking research and design in their product categories, out-profit every other brand in their category. Every other brand in their category has less value both in the marketplace and in sales. As you build your brand, compare yourself to bigger brands in your category. If you're competing in a marketplace with Apple for example, then you're going to have to spend a pretty steep amount on research and design. Apple spends between twenty and twenty-five percent of its overall revenue budget on research and design. In my early days at Herman Miller, they had an entire research division that built assets for the business.
Content-based assets. Research and white papers that help to boost the sales of existing products would be considered assets. Herman Miller researched the power of ergonomics, the comfort levels of office chairs, and so on, with the hope that this research might lead to a-ha moments in which they might come up with new ideas and new projects to initiate. They also knew this content would help sell existing products.
Proprietary technologies. Any competitive advantage that is specific to what you are selling has an extreme value because that doesn't expire in seventeen to twenty years. So in this case, the more research and design you put into your proprietary technologies and processes, the more value your company has.
Intellectual property and patents. You need to spend the money on the product and delay your patent costs until the product is actually launched and you have some revenue generating. Don't get excited by a piece of paper with a seal and bankrupt your funds unnecessarily. Set this piece into your timeline and budgeting plan in the appropriate place, and be patient. Your patent is not an asset if you don't have sales proof.
For All of the Above: Follow my two percent rule.
You should never spend more than two percent of your money on intellectual property costs like patents and trademarks. If your research and design tasks are the product and you need to do models, staff designers (in house or out), you should consider doubling that, and coming in at overall cost under five percent. Whether that's hiring designers, having in-house staff, lawyers, legal fees to file patents, filing copyrights, filing trademarks... those are all included in that two to five percent.
In my experience, the necessary budget for a consumer product startup to actually get to market falls between $80,000- $100,000.
Sales and Budgets Grow Up Together
As your sales grow, you also want that budget to grow up as well, because you want to make sure that you're ahead of the market and product cycles, that you're doing research in your category, that you are understanding your marketplace, and you've got a strong consumer understanding. Think about what this research and time in might cost, project it out, and then figure out where you need to be in your revenue stream to afford these things. Reverse engineer your budget to make sure there aren't gaps or holes you hadn't considered.
If you hit into more than twenty percent of your overall budget on research and design, modeling, prototyping, patents, and filings, without sales revenue growth already happening, you've overspent and are likely going to run out of money. Launching a startup is more cross country, less hundred meter dash. You've got to be in it for the long haul, and to stay in it, you have to be able to fund the full needs of your launch.
BY Entrepreneurs Organization