Startups are underestimating their costs – here’s where to get help

Editor’s note: Startup Spotlight is a regular feature at WRAL TechWire, the focus being on emerging entrepreneur, businesses and challenges facing the entrepreneurial ecosystem.

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RESEARCH TRIANGLE PARK – While prices are on the rise, new businesses may be underestimating their startup costs. 

A new study from business.org found that 53% of businesses say they underestimated costs for their first year in business. 

“There are so many people registering for businesses here, because of The Great Resignation, because of the pandemic,” said Dionne McGee, CEO of DG McGee Enterprises. “So many of those individuals have no idea of what it takes to scale a business. They have the credentials, but—are you generating income?”

McGee’s firm was contracted to create the cohort-based Eastern North Carolina Entrepreneurial Promise (ENCEP) program, launched by Partner Community Capital and the National Institute of Minority Economic Development and funded by NC IDEA.

“A lot of our programming helps startups really get off the ground with minimal cost,” said McGee. (Applications for ENCEP open in July, and the next cohort begins in September.) 

$100k in their first year, plus “hidden” costs

According to the study, storefront business owners are spending $100k on average in their first year, while online businesses averaged $35k.

Will Gaskins, VP of Economic Development and Planning for the Downtown Raleigh Alliance (DRA), says these estimates may be “just the tip of the iceberg.”

Upcoming accelerator for insurtech & fintech startups headlines Triangle Startup Guide additions

Gaskins said that in addition to well-known startup costs, storefront owners may face “hidden” speed-to-market costs, like construction delays, permitting requirements, and staff recruitment. 

“A three-month delay in a business opening and the subsequent revenue doesn’t delay the three months rent that is due,” said Gaskins. “Contextually, those timing delays are increasing across the board the same as inflation and other costs are rising as well.”

Storefront startups need capital, but many can’t access

Gaskins said that timing delays highlight the need for access to capital. 

“This only underscores the need for flexible and non-conventional financing options to supplement conventional financing for entrepreneurs to better adapt to a quickly changing market,” said Gaskins.

McGee said that many new entrepreneurs are not aware of nontraditional funding. 

“I’m finding that when we talk entrepreneurship, and we talk about lending, a lot of people don’t know about crowdfunding, or angel investors, or even CDFIs,” said McGee. “So they’re thinking, ‘I need to go to a credit union, I need to go to my financial institution to get a loan for my business,’ and they’re scared to death, borrowing this money, taking a leap, asking ‘Am I going to be able to afford to pay it back?’”

 The study reported that only 30% of business owners can qualify for a loan in their first year, a statistic that Mel Wright, the owner of the Raleigh-based startup incubator The Wright Village, was not surprised to hear. 

“I believe that is mainly because the majority of the businesses that are starting have what it takes to start a business but do not have access to the resources and tools they need to become bankable,” said Wright, whose organization is focused on Black and underserved entrepreneurs.

“For a new entrepreneur with limited personal capital to self-invest or friend and family investors, that can be a very challenging cycle to get past,” said Gaskins. “They need capital to start and scale the business, and they need to have started the business in order to access conventional financing.” 

Grants and ecosystem partners hope to fill the gap

Gaskins said the funding barrier is “particularly acute” in attracting minority-owned storefront businesses in downtown Raleigh.

“A lot of minorities are not aware, or have access to, I’ll say, some of the funding that is available for these storefront startups, or whether it is an online startup,” said McGee. She specifically referenced The NC Small Business Impact Grant Program (RETOOLNC).

DRA also has two programs designed to help fill the gap for storefront business owners: the Storefront Upfit Grant, which provides up to $10,000 in direct upfit cost assistance, and the Pop-Up Shops at Martin Street, a retail incubator program for minority- and women-owned storefront businesses.

“Our DRA programs have been very successful in meeting the some of that unmet need in downtown and effecting outcome but are also proof that more gap resources are needed,” said Gaskins.

Raleigh Founded also has a program designed to help break barriers for entrepreneurs by providing a legitimate business space. 

“We know that when you’re first starting out, every cost counts,” said Lauren Romer, Director of Raleigh Founded. “That’s why we started our ‘three months free coworking membership’ for early-stage start-ups. This program is on an application basis and is awarded to businesses that meet criteria that align with our mission, vision, and values.” 

Raleigh Founded also recently partnered with the Innovate Capital, a business law clinic supported by Campbell Law students, to help provide early-stage startups with access to free, proactive legal work. 

“Innovate Capital is just one of the many partners we have in the Raleigh Founded community that works to break down barriers to starting and sustaining a business,” said Romer.

Another ecosystem organization, The Wireless Research Center (WRC) in Wake Forest, has spent more than a decade supporting technology-led economic development, helping 80+ startups at its commercialization center and headquarters. 

“In addition to formal programs and funding opportunities available to entrepreneurs, there is a unique resource embedded in our ecosystem that is founded on a core value that ‘your success is our success,’” said WRC founder and CEO Gerry Hayes. “The WRC amplifies this value and provides access to this community resource through initiatives such as RIoT and DigitalBridge.”

RIoT, the IoT-focused economic development group and startup accelerator, is under the WRC brand umbrella. Startups that have worked with the WRC and RIoT have raised more than $400 million in investment capital and created more than 800 jobs. (The other program Hayes mentioned, DigitalBridge, is new—it’s a workforce training hub supported by $4 million from the town and Wake County through federal ARPA stimulus aid.)

Ecosystem resources like coworking space, startup accelerators, training, and mentorship, can be crucial for new businesses, especially for raising awareness about nontraditional funding. 

“Our job is to make sure that those that we are coaching, that we’re speaking to—workshops, keynotes, webinars, what have you—they are understanding what I call the blueprint to growth and scalability, from a business perspective, beyond the LLC filing,” said McGee.

McGee’s firm is hosting a conference in September in Raleigh focused on entrepreneurship, financial literacy, and more; see https://dgmcgee.com/roar-conference.

As part of the study, business.com also shared its free startup cost calculator.

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