How much money do you need? It’s an important question with quite a few variables. I can’t tell you how much you’ll need, but I can help you think through all the potential costs. You’ll have some obvious costs, but many are easy to overlook. You might be able to cut corners on some of them–or leave them out entirely–but make sure you’ve given some thought to each of them. You don’t want any surprises.
The flip side of your costs is your potential revenue. If you were to make $2,000 a month out of the gate, with $500 a month in costs, you wouldn’t have any remaining costs to cover. The hard part is knowing how much revenue you’re going to bring in and how fast your revenue will grow; unfortunately, it’s little more than a guessing game. You can’t be conservative enough when it comes to these estimates–yes, some companies will double their revenue every three months, and some will double their revenue every year, but those wouldn’t be conservative estimates.
In addition to your initial customer base and revenue, you should also consider your revenue growth. There’s a good chance your early months will see solid double-digit growth, but it’s just as likely that your growth will eventually settle into a more moderate and predictable pace. Talking to founders of other online services, 1–2% growth a month is a reasonably conservative estimate, while 2–5% is pretty good, 5–7% is great, and anything beyond 7% is amazing. Now that’s net monthly revenue growth, which accounts for cancellations as well as customers who upgrade. Much of Sifter’s growth came not from new customers but from customers who upgraded–so there’s more to growth than just acquiring new customers.
Acquiring new customers can be easy or difficult, but there’s no doubt it can help if you’ve built a large audience for your product through Twitter, a blog, a $5,000–$10,000 marketing budget, or some other resource. For projections, I would suggest keeping your growth at less than 5% a month until you have real data. In fact, I’d probably stick with 2% monthly growth or less just to be on the safe side.
If you project significant growth and don’t hit it, you’ll spend too much money early on, and you might have to find more money–although if you project low growth and blow the lid off it, you won’t have to worry about that. On the other hand, if you only need $10,000 and you instead raise $100,000, you may be giving away too much equity for cash that you don’t need. The challenge to accurately forecasting revenue is to find that perfect middle ground.
Another aspect to understanding how much you need is knowing what your options are if you run out of money. Could you use credit cards? Could you get a loan? Can your existing investors put in more money? Weigh the risks of running out of money against the risks of raising too much; in some cases, you may be better off starting with less money if you know you can go back to the well should you run out.
Anecdote: Sifter’s Early Growth
I have no idea how many customers you’ll have at the end of your first month after launch, but I can tell you what we managed with Sifter. We had an announcement list with about 1,000 email addresses. I had about 2,000 Twitter followers and about 6,000 RSS subscribers for my personal blog. Finally, we spent about $5,000 on advertising in the first few months. And that was for a product without search, file uploads, or an API; the marketing site was incredibly bare, and Sifter was the very definition of a minimum viable product. I felt incredibly uncomfortable about all the missing features, but we still managed to get by.
By the end of that first month, we were making just under $1,000 a month in revenue. By the end of the fourth month, we were just under $3,000 a month. You might do better or you might do worse, but I hope these numbers, along with the size of our launch audience, help provide a rough starting point from which to evaluate your launch potential.
How to negotiate the Long, Slow, SaaS Ramp of Death. Gail Goodman of Constant Contact helps put SaaS growth in perspective with the story of how Constant Contact grew their business.
And if only 1% of those people…. Derek Sivers shares a great reminder of how easy it is to get ahead of ourselves with overzealous projections.