A few years ago, a friend of mine realized her dream of opening a coffee shop in Europe. It started as a romantic (albeit realistic and well-planned) idea, but it quickly turned into a venture that demanded all of her time---and more of her budget than she had calculated.
First, her dishwasher broke, and because her business could only run if the dishwasher did, she paid the emergency repair rate. Then, as her loyal customer base grew, she had to pay for storage space to keep a large supply of coffee beans, and buy health insurance for more employees. Mugs broke, utility rates rose. You get the idea.
Eventually, she got into the groove of things and was so successful that she opened a second location. But these hidden costs reminded me a lot of what it was like to get my technology startup, SupportBee, off the ground--as well as what it cost to scale it.
It might be that easy to think that tech businesses don't have such hidden costs. After all, the pricing for hosting and software is published on the internet and most of the software you use to build your startup is open source and therefore free. It's easy to think of it being cheap. But you’d be wrong.
What my friend learned in the coffee industry was something many a small business founder--particularly in technology-- will attest to: no matter the depth of your planning for things like hiring, materials, and administrative fees, it’s impossible to anticipate some of the costs that will come your way. (Let’s be honest, how many entrepreneurs have an “in case of global pandemic” savings account?)
Here are some lessons I learned from launching my tech business--without investors or expensive PR teams:
#1: Tech businesses are cheaper than ever to launch, but more expensive than ever to scale
15 years ago, you had to license your own payment gateway or invoicing services, but now we have providers like Stripe and internet-based providers like Quickbooks with free options. Throw in open-source software, and launching a small tech business is much more affordable than it used to be. (Tip: some software providers offer free services to startups specifically, in the hopes that they’ll convert to paid users as they grow, like Stripe Atlas. Take advantage.)
The bulk of your scaling costs will be hiring personnel. Small business owners who are serious about their growth investment need to hire the best talent out there--the same talent that’s working at places like Google or J.P. Morgan (which is why so many strapped startups try to lure top-tier applicants based on culture and other “perks”). Even with COVID’s push to remote work, it’s hard to find good talent at a less intimidating price. But it’s worth the upfront cost; expensive but highly-talented developers can build a better product and earn your business much more money, in the long run.
Also consider that you’ll need to hire people who earn a range of salaries. While bringing on another administrative assistant might not break the bank, you’ll eventually need legal counsel to respond to all the notices you’ll get from state and federal departments as a cost of doing business. For example, the government can claim you owe something when you don’t. Even with no balance, you’ll still have to pay accountants and lawyers to prove that $0 is due.
One final note on this: as my company grew, I kept expecting the same rate of resolution and productivity from my team. That is not reality. As a business scales, larger teams will never be as efficient and effective as a small team--the challenges become more complex, the goals get bigger, and more employees means a wider variety of communication and work styles, all of which will slow the blistering pace of a brand new business. There will also be more QA involved before shipping software as more people rely on it. If you want to move fast and break things, you’ll definitely break things.
#2: Bigger companies will influence what your smaller company spends
When Google decided to set a high standard for partners integrating with its API, it set in motion a lengthy and expensive vetting process--which translates into a significant financial obligation to the small businesses that want to integrate services with Google products. Big tech companies like Facebook make decisions that result in, say, new compliance laws that your business will need to meet. Whether it’s a developer who is writing code for GDPR compliance or an infosec consultant who will prepare you for Google's API security review, you’ll need to open your wallet.
This is where hiring costs will be a different kind of expenditure than simply expanding your full-time team. The big companies can hire recruiters and bring on full-time talent for these one-off events like compliance adjustment or third-party risk assessment. Small businesses, however, will turn to freelancers on major platforms they can afford, like Upwork and Fivrr. That means you don’t know if the person you’re paying $1,500 to build and manage a monster excel sheet will actually do a good job--and if they don’t, there’s not much you can do about it. That becomes a “double cost”; you lose the value of the assignment, and additionally incur the expense of fixing it.
The lesson? Plan for much of your early budget to go toward test-driving new freelancers with an expected margin of failure. At SupportBee, we paid a social media ad buyer a generous fee only to find that our company name was spelled wrong on all the ads. Even an SMB owner that puts a new person on payroll may wake up to find that person has ghosted after two weeks of work.
Don’t let these experiences stop you. Commit to a certain velocity and in the end, you’ll see the losses as part of your learning curve (and find amazing go-to freelancers in the process!).
#3: You’ll have to budget for fighting spam
It’s an unavoidable truth: spammers will use your service to send out spam--especially if you’re service is based on email/voice/text communications like SupportBee is. You can’t lock it down easily, since spammers are always finding new and creative ways to bypass safeguards. When my co-founder and I ran Muziboo, our first startup, spammers would upload tons of mp3 files to use as a backend for their music business. Regardless of what service you’re offering, people will find a way to abuse it for profit. (The story of Paypal's struggles with spam in its early days is well known; they were losing a million dollars each day to the practice.)
You’re waiting for me to say, “Factor in the cost of a good spam filter,” but there’s a personal cost to this that is less obvious: spam activity is a precursor to having your credit card information stolen. Scammers move quickly from victim to victim, and unfortunately, it will become easier to acquire your personal data and test drive your corporate credit card information with multiple fraudulent purchases in small amounts. Those amounts add up, along with all the unpaid time you’ll spend refuting charges, filing claims, and requesting new cards.
Speaking of spam, check your spam folder. You might realize you forgot to turn off that Facebook ad you ran a month ago, and now your bill is due.
#4: Security and performance are never-ending expenditures if you care about their customers
As a business grows, it deals with a higher volume of customer data, and performance issues will become a more common problem. For any technology company, maintaining a system that serves 100 customers will look vastly different than monitoring a system serving 1,000 customers. The choice is to upgrade to a new system ($), or build your own scalable system from scratch ($$$$).
New security vulnerabilities are born every day, which requires constant infrastructure upgrades. Going from a small to a medium business always creates a point where you’ll need to hire some people to do the work and safeguard your customers, since you’re essentially expanding your threat surface. And, a high availability rate becomes more crucial with more customers. (That’s the big difference between a startup and a business; your early adopters will have more patience for service interruptions, whereas a larger base will not.)
If you plan to continue growing, building out infrastructure vs. plugging holes with anti-virus software is the one that will serve you the longest, be the most secure, and reduce service outages while resolving things like cyberattacks.
#5: As time passes, modernization costs wait in the wings
Congrats, your business is really off the ground! But you’ll need to move to AWS, which will cost you thousands per month. You have reached one of your worst growing pains: at the start of your business, you had a few customers who understood you were a young business, so you had the time to build what you needed. Now, you’re just on the cusp of needing a more modern infrastructure--but you must first invest in the upgrade before you can see a profit.
Initially, I was doing all the customer support myself and I could log in to our database and get what I needed. As we scaled our customer support, this was not sustainable, nor was it secure. We had to build out infrastructure to support our customers while also keeping them safe. This included logging data; if you don’t have logs you can’t debug anything. For example, if a notification for a customer email goes missing, you need to be able to track it across the entire system. Eventually, your business will require a support engineer when customer issues become more technical than your core staff can handle.
One way to cut down on this cost is to design your features in a way that makes them easy to patch and that leaves a trace of every interaction. While a handful of employees will understand these changes, you’ll need to train everyone else. Plan for minor fiscal losses during your modernization process, which will require service downtime.
Perspective is everything
A couple of years into my business, I realized that while I didn’t hurt for customers, I was still eating a lot of ramen and lived in my home office--a recipe for burnout. That’s because I was still running my business as if it was still a brand new startup. What works in the first month is not sustainable for the next two years, and crossing the divide requires additional funds.
Why do so many small business owners take time to realize this? Because first-time entrepreneurs, by nature, are amazed at the power of creating something people want to pay for. We’re immediately satisfied when someone--anyone!--wants to cut us a check for our service or product. In the beginning, I thought a $20 per-customer income was an impressive amount of money. If I had stayed in that mindset, I’d be bankrupt.
We all learn by walking the path but I am putting this blog out there for myself as much as for other entrepreneurs. Even now, it's easy to think of building companies as cheaper than they are. At any stage, it usually takes a lot more than you anticipate.
That’s why it’s important to follow the motto, “perspective is everything.” I didn’t raise any money, I didn’t start with a ton of capital, and Il had unanticipated costs--and I was still successful. The lesson of hidden costs helped change my perspective in a way that set me up for success. Instead of trying not to spend a penny out of my planned budget or feel deflated because I took a financial hit, I accepted that it “takes a million to make a million,” so to speak.
To hear more about how I got our small tech business off the ground--and bootstrapped it all the way to $45k MRR--watch my interview with Nathan Latka!