Small businesses are the backbone of America, and some of our greatest innovations in recent years have come from tech startups nationwide. If you’re in the process of getting your startup off the ground, we commend you for making such an exciting investment in yourself. To help you set off on the right path, we gathered a few financial tips for navigating the startup landscape and working toward long-term financial success.
Understanding the Financial Landscape for Tech Entrepreneurs
Growing and preserving wealth requires you to be realistic about the challenges ahead. Startups, especially those in tech, are statistically (and a bit notoriously) more volatile than other types of businesses. Getting an idea or product off the ground and into the hands of happy paying customers is challenging, and unfortunately, many have not been successful at it (at least on their first try).
This isn’t, by any means, meant to deter you from forging ahead. Instead, it’s essential to understand that start-ups are financially risky. Suppose your goal is to start a new business in tech. In that case, you’ll need to align your financial goals and decisions with those business objectives while building a “safety net” to protect yourself from unforeseen circumstances.
Common Financial Milestones for Startups
Every company experiences unique milestones, but it’s helpful to have a birds-eye-view of the financial milestones you may experience in the coming months or years:
Initial launch: This is when you bring your initial idea to life. You’ve completed a prototype, decided on a target audience, and identified a purpose or need for your specific product or service. At this point, you may still be holding on to your full-time job or focusing solely on growing your new company.
Hire a team: It’s one thing to go on a solopreneur adventure, but it’s a whole new ball game when you start building a team. Now, other people’s livelihoods depend on your company’s success, which pressures any leader to do well. The cost of hiring five employees in the first year of business is around $300,500 — a substantial investment for a relatively new company.1 Expanding your team also coincides with scaling and growing your company.
Exiting the company: For tech founders, the end goal is often to pursue an IPO or an acquisition. At this point, the company has achieved high success, and your net worth will have grown significantly.
Startup Funding Options
You may have heard advice about never using your money to fund a business venture. Other people should believe in your product or vision (enough to invest in it) so you know it has a fighting chance of succeeding in the market.
Tech startups need funding to become sustainable and grow over time. There are three primary sources of investments for startups: family and friends, angel investors, and venture capitalists.
Family and friends: These investors will likely invest in the startup’s early stages or seed rounds. Family and friend investors may provide critical capital but are typically not involved in strategic decision-making or business development.
Angel: Angel investors are high-net-worth individuals who qualify as “accredited investors” with the SEC. They tend to invest during the early stages of a company as well. Unlike family and friends, angel investors offer strategic business acumen and will often serve as board members or advise in some capacity.
Venture capital: Venture capitalists are private equity firms that can invest at any growth stage. VCs are heavily involved in the business’s operations and generally invest the most significant amount of capital and resources out of the three.
Building a Solid Foundation: Personal Financial Planning
While you’re still in the initial stages of running a startup, focus on establishing your financial baseline. Total your current savings, investments, and other assets, and subtract any debts, bills, or tax obligations. This will give you a basic understanding of your net worth.
Then, focus on figuring out your cash flow — money coming in and going out. While your net worth can help you understand how much “cushion” you have to fall back on in the future, your cash flow is critical to managing your day-to-day financial obligations.
From there, focus on establishing (or adding to) your emergency fund. Because startups are notoriously risky, having a robust emergency fund is critical. We recommend building up your emergency fund to cover around six months’ expenses as a general rule of thumb. If, based on your calculations above, your monthly financial obligations add up to $10,000, then your emergency fund should have $60,000 in it (or more, depending on your unique situation).
Consider keeping your full-time job until you can reach this goal. Otherwise, you may be forced to draw down your other accounts, like your retirement or brokerage account, if an emergency arises.
As a business owner, your financial health depends heavily on how your startup is doing. With that in mind, prioritize creating a realistic budget for your business and closely monitor your cash flow. If you’re working with an angel or venture capital investor, they can help you find ways to control expenses and maximize profitability.
Another critical financial obligation of business owners is to pay and manage business taxes. Not only will you likely have to pay quarterly taxes, but you’ll want to look for tax incentives, credits, and deductions related to running your business. We highly recommend working with a CPA or other tax professional to address and minimize your tax liability.
Let’s Navigate the Startup Landscape Together
The startup world is exciting, and, more than ever, it’s full of opportunities to find success. If this is a path you’re considering pursuing, keeping a close eye on your financial health is essential. Our team at Brightview can help you navigate the ins and outs of entrepreneurship while prioritizing the financial obligations today and goals for the future. We encourage you to book a meeting anytime.