Total cost of working in a startup (read: opportunity cost)

opportunity costI have seen many starting business saying that cost of running their operations is very low. Usually they say that they have to pay for servers, maybe some ads and that’s it – a few people working and total cost just under 100EUR.

Unfortunately people often forget the biggest cost – opportunity cost. Lets take simple example that you are a good programmer and building your very own business without taking any salary.  You also have great value server from Hetzner with monthly payment of 50EUR. Total cost of running this business is 50EUR a month because no salary is taken or is it?

Because you are a good programmer the you could work for any other startup(or Google/Facebook in Silicon Valley) and get 4kEUR of net income every month. You could also hire exactly as good programmer as you are with exactly same salary to build your business. When adding up the 4000EUR of salary and 50EUR of server fees you get 4050EUR of the monthly burn rate.

What is the difference from business point of view in above 2 situations? In both cases there is one good programmer working full time on the business. In both cases you end up without any money in the end of the month and of course each month there is 50EUR of server fees. Situation is exactly the same.

If you look further then actually there is slight difference. If you hire someone then because of the taxes you have to pay approximately twice the amount taking 4000EUR up to 8000EUR. This would suggest that working on your own is more cost effective than hiring someone. However if Google is hiring you then it also sees you creating value of at least 8000EUR a month.

Make sure that when calculating the ROI of your business then you consider the real total cost of 8050EUR instead of 50EUR. I also recommend you to ask yourself if the business even theoretically is able to bring back that money? Consider also need for many people: developers, salespeople, support, QA, managers etc. Your burn rate can be 100kEUR a month very easily. If it is hard to make that kind of a income then maybe it is worth helping other more potential startups make it happen?

 


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