A Guide to Reducing Startup Costs & Expenses
Last updated on February 9, 2023 by
Saving Money While Running Your Startup: Part 1
Launching a biotech startup can be a challenging, complex, and expensive process. There are many obstacles that must be overcome, including securing funding, navigating regulations, and developing a viable product or service. Many businesses in the life sciences require specialized equipment and lab space, which can be very costly.
Biotech startups also face intense competition from established companies, making it difficult to get a foothold in the market. Additionally, the research and development process for biotech products can be lengthy and costly, and there is always the risk that the product will not be successful.
Despite these challenges, many entrepreneurs are drawn to the biotech industry due to the potential for breakthroughs and the ability to make a positive impact on people’s lives.
This is the first in a series of articles about launching a startup while keeping startup expenses and costs low. As a founder and entrepreneur, you’ll always be calculating when to bootstrap, when to fundraise, when to spend upfront for short- or long-term gains, and how to make your money last longer.
In our series opener, we’ll discuss ways in which you can lower your initial startup costs. Following these early-stage strategies can help you get the most out of the limited funding you might have in the beginning of your company’s journey.
What Are Startups Costs?
Startup costs refer to the one-time payments incurred when starting a new business. Expenses, on the other hand, typically refer to the ongoing expenses. Costs and expenses can include a wide range of things, including:
- Pre-launch costs, such as market research, product development, and prototyping.
- Business registration and legal fees, such as incorporating or registering the business.
- Equipment and inventory costs, such as purchasing or leasing office equipment, vehicles, or inventory.
- Operating expenses, such as rent, utilities, and insurance.
- Salaries and wages for employees.
- Marketing and advertising expenses, such as creating a website, business cards and flyers, and promoting the business.
- Professional fees, such as legal, accounting, and consulting fees.
- Travel expenses for networking, attending conferences, and visiting suppliers or customers.
- Technology and software expenses, such as purchasing computer hardware, software, and IT services.
- Financing costs, such as interest on loans or credit lines used to fund the startup
It’s important to note that startup costs can vary widely depending on the type of business and the industry it operates in. For example, biotechs will have some very specific costs and expenses to cover, including additional research and development costs and expenses, intellectual property fees and expenses, laboratory space rentals or purchases, regulatory compliance costs, and additional equipment costs.
How to Keep Startup Costs Low
There’s no way around it: starting a business is expensive. Your startup expenses are going to add up quickly, from renting lab space to buying or leasing lab equipment to paying salaries and wages for scientists and managers.
As a founder and entrepreneur, calculating when to bootstrap, when to fundraise, when to spend upfront for short- or long-term gains, and how to make your money last longer is part of your daily routine.
Budget Early & Look to Bootstrap
There is no big secret here. In the beginning, most of your capital might have to come from no one other than yourself, rather than through external funding from investors or loans from banks.
If you’ve planned well, you’ll have saved up some money to fund your initial projects. You might even have friends and family who are willing to take a chance on you to provide you with initial investments.
This is the “bootstrapping” phase, which means you’ll have to start thinking about where you can cut back on personal spending and keep costs down to extend your funding.
All the standard things that you’ve heard from magazines, blogs, and on various platforms apply here: make coffee and cook at home, cancel subscription services you’ve forgotten about, set up a home office if possible, etc.
Other ways you can bootstrap your business include:
- Offering a service: This can help a founder generate revenue more quickly and with less upfront investment.
- Crowdfunding: A founder can use crowdfunding platforms to raise funds from a large number of people, usually via the internet.
- Bartering and trade: A founder can negotiate deals with suppliers, partners, and other businesses, trading goods and services instead of paying cash.
- Leveraging existing networks: A founder can leverage their personal and professional networks to generate business and find new customers and partners.
However, it might not always be possible to save and retain enough capital simply by taking these types of steps. Bootstrapping a business can be challenging and requires a lot of hard work and dedication, and it’s not suitable for every kind of business.
You will need to make a budget for yourself, stick to it, and try to set aside anything you can as savings. Consider making a financial cushion for yourself to mitigate the risks and cover expenses while the startup is not generating enough revenue.
As you increase research and development efforts, move out of shared workspace, and look to scaling operations, it may be too difficult to survive on bootstrapping methods alone.
With a simple business plan, you may be able to get some small business grants very early on. Still, additional funding will eventually be required to collect additional data, complete experiments, and develop a minimum viable product.
A more robust business plan that illustrates your financial health and forecasts can increase your chances of securing new funding. In addition to grant funding and private funding, you may consider taking out a business loan.
Don’t Quit Your Day Job
If you’re currently building a company but working full-time, you might not want to quit your day job. At least not yet. According to the Small Business Administration, roughly 50% of new businesses survive past the five-year mark.
While refining your idea and business plan, you still need income. The time it takes to make your business viable is completely unpredictable and takes a huge leap of faith, so keep a steady paycheck as long as possible.
There is no sugar-coating it: you are going to be busy. You’ll have to sacrifice a lot of free time, and probably a lot of sleep. Eventually, your business will grow enough that you’ll need to focus on it full-time before you start earning revenue, so think about building up savings during this time too.
Having an income is important for getting personal loans when you start having to do more significant spending. It will help if you have a good credit score and a solid influx of cash for banks to approve your loan application. While you should be cautious when accruing personal debt, access to personal loans can be a game changer early in your business.
It’s difficult to say when exactly you should consider focusing on your startup full-time, as the timing can vary greatly depending on the individual circumstances of each startup and founder, such as the stage of the startup, the founder’s personal financial situation, and the level of support from investors or other partners. This decision should be based on a careful consideration of the risks and opportunities involved and it’s not a one-size-fits-all situation.
That said, it might be a good time to quit your day job and focus entirely on building your startup business once your startup has reached a point of sustainable growth and revenue, and has a clear plan for future growth.
Control Your Overhead
One of the principal ways to save money while running a business is to control overhead costs. This means managing your spending and monitoring cash flows in regards to anything that can be considered your overhead. Creating a strict budget for anything that isn’t directly related to making or distributing the product you’re selling is a good place to start.
Business overhead costs that tend to eat up the most budget include rent for office space, administrative costs, and salaries for staff that don’t directly work on making your product. It can also be very hard to stop spending on these once you’ve started, so we recommend being conservative from the beginning.
Other examples of overhead costs and expenses for a startup include:
- Equipment and supplies, including computers, furniture, office supplies, and other equipment necessary for the business to operate.
- Insurance and fees, including liability insurance, property insurance, and worker’s compensation insurance.
- Legal and accounting fees, such as expenses related to incorporating the business, obtaining necessary licenses and permits, and ongoing accounting and tax preparation services.
- Marketing and advertising: These costs include expenses related to promoting the business, such as website development, social media advertising, and direct mail campaigns.
- Technology, such as expenses related to software, hosting, and other technology-related costs necessary for the business to function.
- Travel and entertainment, including expenses related to client meetings, networking events, and other business-related travel and entertainment expenses.
- Utilities, including electric and gas, water and sewage, internet and phone, trash and recycling, and heating, ventilation, and air conditioning (HVAC).
Note that overhead costs can vary depending on the type of business and industry, and it’s important to have a clear understanding of all the costs that will be incurred before starting a business.
If you have access to lab space through an academic institution, use it as long as possible. Otherwise, look into lab-share resources and other services, such as core lab facilities, contract research organizations, and coworking spaces. Try to rent or lease your equipment, and don’t overbuy supplies. Anything that is low-cost right now can help you survive the startup phase of your business.
Another cost-saving strategy for startups is to consider purchasing used equipment. This can be especially beneficial when buying computer systems and electronics, as older models can often be found at a much lower price than their newer counterparts. This is also true for vehicles and machinery, where buying used items from another business can result in a cheaper deal.
However, it’s important to thoroughly evaluate the condition of the equipment before making a purchase, to ensure that it will meet your needs and perform well. It’s important to check the warranty and return policy on the used equipment as well.
Although buying used equipment can be a great way to save money and get the equipment you need for your business, doing this research upfront can save you from buying something that may break down on you and leave you with sunken costs. Further, buying used may result in poor analytical results if you’re conducting experiments.
Lease Instead of Buy
If buying used is out of the question, another alternative to buying expensive equipment outright is leasing. Leasing can be a more cost-effective option, even when compared to buying used equipment. This is because leasing eliminates the need for a large upfront payment and allows you to spread the cost of the equipment over a longer period.
According to the Equipment Leasing and Finance Association, 80% of businesses in the US lease some or all of their equipment.
Leasing can also provide more flexibility, as the business can upgrade to newer equipment when the lease is up. Additionally, leasing can provide tax benefits and help businesses to avoid having to tie up too much of their working capital in equipment. If you’re considering leasing, learn more about our leasing program.
Keep Your Team Small
Having a co-founder or a partner to help you do the big thinking as you build your business can be incredibly helpful, but you don’t need to add staff members until you have a significant amount of work for them to do. Staffing smartly can help you reduce your initial startup expenses.
Generally speaking, a startup should start hiring new employees when it has reached a stable level of revenue and has a clear plan for future growth. Or, when it has secured funding that can be partially dedicated to the salaries and wages of new hires.
According to a study by the National Small Business Association, the average small business starts hiring employees after 2 years of operation. This data is based on a survey of small business owners conducted by the National Small Business Association in 2019.
Nothing is worse than letting someone go after you hire them, so make sure you have plenty of budget for staff before you add them. You will need lawyers and accountants early on, but avoid entering into long-term contracts or retainers.
If you need extra help, try to find people who are looking for hourly work and open to joining your team permanently as you grow.
Consider a Line of Credit
Managing finances for a startup can be challenging, even with the best strategies in place. One way to alleviate this is to open a business line of credit, or LOC. LOCs generally offer a flexible borrowing limit that can be accessed at any time. It’s similar to a loan, but with more flexibility in terms of repayment and borrowing.
Having a floating line of credit can give you access to a safety net of available funds, so that it’s possible to cover unexpected expenses or take advantage of opportunities as they arise. It can be a valuable tool for managing cash flow, and can help a startup to be better prepared for financial challenges.
Form Partnerships & Look for Discounts
Partnering with other small business owners in your area can be a great way to manage financial challenges. Collaboration can take many forms, from bartering goods and services to jointly promoting each other’s businesses, licensing intellectual property to one another, or co-developing a product.
Collaboration is a key strategy for biotech startups as well, as it can help to manage financial challenges and accelerate the development of new technologies. One example of this is the partnerships between biotech startups and larger pharmaceutical companies. As mentioned, partnerships can take many forms, and include joint ventures and collaborations on research and development, in addition to licensing agreements.
One recent example is a partnership between a biotech startup and a major pharmaceutical company, where the startup has licensed its technology to the pharmaceutical company in exchange for an upfront payment, milestones payments, and royalties.
This type of partnership can help the biotech startup to access the resources and expertise of the larger company and accelerate the development of its technology. On the other hand, the pharmaceutical company can gain access to new technologies and diversify its pipeline.
Our Thoughts On the Bottom Line
Taking the leap and starting your journey as a small business owner is scary. There are countless unknowns, and managing your money correctly can be quite difficult. This is especially true if you’re up against tough competition.
To fund your business operations, grow and scale sustainably, and secure more funding in the future, it is generally smart to keep your startup costs down where possible. The best time to minimize your business expenses is before you even have them, but minimizing costs requires careful business planning and money management from the beginning.
Because you’re in uncharted waters, look for support wherever you can. Connect with other founders in various stages of running their businesses, look for advisors you can trust, and don’t be afraid to ask for help running your new business.
Taking the necessary steps can help you create a solid financial plan that will help you manage your finances as a small business owner. This includes creating a budget and forecasting future expenses and revenue.
It’s essential to have a clear understanding of the financials of your business, including cash flow, profit and loss, and to regularly review and update the financial plan as the business evolves.
This will help to ensure that the business is prepared for any unexpected challenges and that there is enough funding to support growth and expansion. Additionally, it’s important to be mindful of financial best practices such as keeping accurate financial records, having multiple funding sources and having a contingency plan to manage unexpected financial challenges.
Other articles from the Saving Money While Running Your Startup series: