I recently had a terrific conversation with a soon-to-be entrepreneur.  He had pretty much everything set — a unique idea, the right set of skills, co-founders who would bring a nice mix of talent, enthusiasm, connections, etc.  If you asked me, this seemed like a pretty good start to a startup.

Then I asked the question — “So what are you guys doing for startup capital?”

A blank stare came back at me.  “Startup capital?  We don’t need any yet.  Well, I mean we’ll probably do an angel round or something… but we don’t need that for a while.”

Well… you may not think you need startup capital, but odds are nearly every business requires something to startup (more than just sweat equity of the founders).  The question isn’t whether you’ll need it (you will), but is how much (typical range is $15-75K) and where to find it (check the mirror).

What is “startup capital?“

Some people call this seed money; others call it startup capital or initial capital; and still others use terms like founder capital. The short of it is, that this cash represents what you needed that can’t be paid for with your sweat and your time.  Real cash expenses.

Unfortunately, what this promising entrepreneur I’d been speaking with failed to recognize is that it takes money to start a business — really nearly any business, even the most lean, bootstrapped business takes some cash to get it going.  And that isn’t the type money you raise from angels or the like.  This is real startup capital to buy things like office supplies, business cards, software, laptops, test equipment, licenses, paying for a developer or designer, etc.

How much startup capital does a business need?

Obviously, that depends — and it depends on what period of time we are talking about.  If you plan to bootstrap the entire way through, you may be talking one amount or if you are just trying to get setup and have a seed investor or angel investor lined up, then it could just be a month’s worth of startup costs.

In his book Entrepreneurs in High Technology, Edward Roberts interviewed entrepreneurs to help identify issues that face a startup in its first days.  One of those important items is startup capital.

Roberts’ research examined the amount of funds needed for the initial capital of the business and where startups had obtained those funds. Here is what his research found:

• Nearly 80% of those companies surveyed said they had needed less than $50,000 in initial capitalization,
• Nearly 48% needing less than $10,000

(Note: these figures are as of 1991; using the Consumer Price Index to adjust these figures to 2007, the numbers would be approximately $76,000 and $15,000, respectively)

How much should a founder plan on for startup capital?

According to the 2004 financing report from the Global Entrepreneurship Monitor, the average amount needed to start a business was $53,673. For businesses that were necessity-pushed (driven by a currently unmet need in the industry), the average startup only required $24,467. Depending on the industry and the specific growth plans, each business may require more or less to startup their business.

Where do founders get this startup capital?

According to the GEM report, more than 65% of the startup phase funding comes from personal savings, credit, and through informal investors such as family and friends. According to Roberts, 74% comes from founder savings.  In either case — the bulk of it needs to be accessible by founders through their savings, credit cards or other readily available sources.  Don’t expect an angel to magically fall from the sky and provide you this $15,000 to $75,000… think ahead to ensure your founder team has that available.

The perception may be that startups open their doors after receiving a big investment from an angel or a venture capitalist. However, this is far from the truth. In fact, it is very uncommon for a startup business to open its doors with venture capital funding in hand (fewer than 1 of 10,000 startups have VC money in the bank when they open for operations).

Understand what it will take to get the business going — including the money that will be needed before you ever see a dime from outside investors.  Do you have that money available?  Can you get it?  Will your husband or wife be okay with you depleting the savings account to get there?

Better to ask the questions before you start rather than realize that need after you have opened your doors…