Why you can’t build a startup for $30k

I recently had a potential client contact me with an idea for an app that he wanted built.

His total budget was $20k – $30k, which he had been told was reasonable by several different shops. He was shocked when I told him he needed at least 10x that amount to have a reasonable chance of success. To be clear, not all of that was for development, but that was small comfort.

To understand why the disconnect between what I was telling him and what other dev shops were telling him, we need to back up a little bit. I’ll explain how to determine what you need for a mobile app startup, and then give you some options for how to get there.

As to my background and why my experience in this area is relevant: I’m a solo consultant and developer, and I’ve been helping startups build, launch, and grow successful web and mobile products since 2007.

I’ve done substantial work on 100+ websites and apps, which have collectively grown to many millions of users. I’ve also built, launched, and grown several of my own products.

Important note: if you’re a technical team that can do your own development, some of this doesn’t apply to you. Well, it still applies to you, but you can fudge things by using your time instead of outside capital. The core truth here is still probably the same though!

So back to our friend with the budget that was 10% of what he needed.

Without giving away his idea, it involved geolocation, photos and videos. Let’s call it Photoloco for short.

Now, building a solid app that integrates geolocation, photos, and video is already a substantial undertaking. However, depending on the developer or firm, it’s feasible to build something for under $50k with those features.

However, the core idea of Photoloco also required scale. This was a consumer-facing app that had a strong network effect, meaning that it wouldn’t have been useful without thousands of users, at the very least. Realistically, it needed millions of users. Think of Twitter or Facebook and how they’re only useful because lots of people use them.

In order to achieve that milestone, Photoloco needs growth. Not small growth or even big growth. Massive, insatiable, melt-the-servers growth. Think 5-10% growth per week at least.

Paul Graham has a term for companies where your focus is this kind of exponential growth: startups.

So when determining whether your budget is reasonable, the most important thing you need to figure out is this:

Are you building an “app” or a “startup”?

The difference is crucial, because if you try and do a startup on an app budget, you’re going to blow through tens of thousands and have almost nothing to show for it.

Note: I’m going to differentiate in this article between apps and startups, but feel free to call what you’re doing a startup, even if it’s an app. It’s more fun at parties.

So what’s the difference?

If you’re building a startup, then you’re building something that can only really be successful at scale, and growth is your primary and immediate focus. You may not even have a business model yet. Your immediate goal at this stage is to build a huge userbase as quickly as possible. It’s very likely that you’ll fail, but if you succeed, you can reach valuations worth hundreds of millions or billions of dollars. It’s very high risk, very high reward.

On the other hand, if you’re building an app, you have an idea that would be useful or valuable, and your immediate goal is something other than exponential growth. That doesn’t mean that you’re not interested in growth, but it’s not the thing that keeps you up at night. Your immediate goal might be profit, promotion for your business, improving an internal process in your business, or even just fun or exploration of an idea.

How do you tell the difference?

Well, right off the bat, if you’re an established company building an app for promotion, to extend your existing product line, to promote your business or products, or for internal reasons, you can skip to the next section. You’re clearly not building a startup 🙂

If you’re building a new business though, here are some questions to ask:

  1. First, look at your target market. Is it consumers or businesses? Most (but not all!) B2B plays are apps, not startups.
  2. Next, how will you make money? Do you have a business model yet? Is it based on advertising? Or selling data? Both of those require a lot of scale. Or will the users pay directly for the product?
  3. Do you have a marketing plan? Is it “viral”? Is it “word of mouth”? Or do you have clear marketing channels where the LTV > CAC, even for early customers?
  4. Speaking of early customers: if you only have one user of the app, will it be useful for them? Will you make money from them? What about your first 1000 users? Or do you need a lot more than that before bringing in revenue?

Here are the rules for apps:

1. Apps don’t have a network effect issue to overcome

The app has value from the very first user, or close to it.

2. Apps have a clear audience who will pay for what they offer

The more niche the audience and the more urgent the problem that the app solves, the better.

3. Apps have a business model from customer #1

As a result of the above two rules, apps have the advantage that they can land customer #1 and make money. It might not be a lot of money (although it can be if customer #1 is an enterprise customer), but it’s revenue. For example:

  • You have an app to help car dealerships keep track of the vehicles on their lot. You go pound the pavement and sign up your first dealership. Revenue!
  • You sell training videos to budding SeaWorld employees. Ralph in Louisiana has always dreamed of moving to Orlando to swim with the dolphins and buys your video pack as your first customer. Revenue!

You get the idea.

By contrast, if what you need from your first users is them to spread the word, give you data, click on ads, etc, and you’ll only make any money once you have thousands or tens of thousands of them doing it (and likely millions), then you’re building a startup.

Final note on this: advertising as a revenue model almost never works without raising a lot of money or supporting the project somewhere else (with money or with time). The raw math involved is brutal, because you’ll typically make only pennies from each user at best, requiring you to have hundreds of thousands or millions of them to overcome your fixed overhead and be profitable.

OK, but why the price difference?

So now that you’ve determined whether you’re building an app or a startup, why the huge price difference between the two?

Just to be clear, it’s not always the case that building an app is cheaper than building a startup. There are many apps that would cost $500k to design and develop. But the converse is not true: there are basically no startups that you can build for $50k, and few that you can build for even $500k.

Here’s why:

1. The bar is higher for startups

The whole point of a startup is to attack a huge market and grow quickly. This means that you need to have a good idea that addresses a large market, and you need to execute very well.

Executing very well is expensive. I always chuckle when someone says they want to build an app like Uber or Instagram and they have a budget of $50k. Fifty thousand dollars! Surely there’s nothing these “simple” apps are doing that would cost more than that!

But these “simple” apps have hundreds of full-time engineers building and maintaining them and their infrastructure, at $250k+ / year in total compensation each. These companies are spending hundreds of millions every year just on engineering headcount for these “simple” apps. And even when they started, they spent a lot more than $50k building the first version of their product.

Simplicity is hard.

Building novel functionality while retaining simplicity is even harder.

Combining simplicity and novelty into a package engineered for massive growth is damn near impossible, and that’s what’s so hard about startups.

So why isn’t this true for building an app, not a startup?

Well, very good app ideas that are extremely well-executed can be equally hard and expensive, but less necessary if your goal is something other than growth.

For example, I’ve worked on or built apps to help pilots review test material, teach people how to play Ukulele, let users keep a daily journal, help people relax with HD aquarium videos, and a lot more. These apps weren’t cheap to develop, but they’re relatively straightforward and don’t really have novel functionality. But that’s ok, because they’re competing in a smaller market.

By contrast, if you’re building a photo sharing app today, you better have something jaw-dropping amazing to show the world if you expect to get traction. Incremental improvement will do nothing. You need to be 10x to 100x better.

But if you’re building an app to teach mechanics how to rebuild the transmission on a particular model of John Deere tractor, you don’t need to be fancy to win. Your app just needs to work.

OK, so the high bar is one reason that startups are more expensive. Here’s the second:

2. Growth itself is expensive

Well, you’ve got a great product. Now what? Remember, startups need 5-10% growth per week! That’s easy when you have 10 users, you just need to add one new one this week, but what about when you have 10,000 users? You need to add 1,000 new ones this week. And when you have 100,000 users, you need to figure out how to add 10,000 users this week. That’s more than 1400 people per day.

Word of mouth is great, but you better not be banking on it. The super high growth startups out there didn’t grow by accident, they engineered it.

Content marketing, growth hacking, paid user acquisition, PR, etc, etc. They all work, and they all cost money. If you want to grow an app to millions of users, be prepared to shell out millions for marketing.

Additionally, that kind of growth requires a lot of rapid investment in infrastructure and support, and many startups aren’t going to have the investment.

Exceptions

Are there exceptions to the two paths above?

Well, it depends how you define it. There are lots of companies that switched from the app to the startup model. Maybe they bootstrapped their way to being decent-sized and profitable, then pivoted or spun out a startup.

But is the reverse true? Are there successful startups out there that behaved like apps? Ones that grew very quickly and raised little to no capital? Perhaps, but they’re exceedingly rare, and were essentially all started by teams that had amazing technical skills, sales skills, or both. And then got very lucky.

If you have to ask, you’re not one of these.

So now what?

Well, if you’re indeed trying to build an app, and you have the budget to build the features you need, then you’re good to go. However, I still have a long list of tips to help you maximize your resources and dramatically improve your chances of success. That will be the topic of a future article.

But what if your idea is a startup idea, and you have under $100k in budget?

First of all, if you have less than $10k, please be very careful. You can find devs that will tell you they can build your product for that budget (or much less), but it’s a lie. You’re about to waste a lot of money and have a very poorly-written codebase that is riddled with bugs and eventually has to be thrown away. You need at least $10k to proceed down the path I’m about to lay out, and $30k – $50k is more reasonable for most.

I know what you’re thinking:

“What about that team I read about on Techcrunch? Why can’t I build an app for, say, $5k, launch it, and watch it explode in popularity like they did?”

This is called winning the lottery, and it’s a very, very bad idea to bank on. So effectively, there is no way to do what you would ideally want without getting very lucky. Proceed down that path at your own peril.

Your realistic options are the following:

  1. Change your model to something you can bootstrap
  2. Use your seed capital to raise more capital

Let’s talk about each approach.

1. Change your model to something you can realistically bootstrap

Switching your idea from a startup idea to an app idea is an option if your idea allows for it, and if you can commit to it. Both of those conditions are rare, in my experience.

This would involve stripping out functionality, narrowing your target audience, having a clear business model (that isn’t advertising), etc.

Most importantly, you can’t have a model that relies heavily on the network effect. If the app isn’t useful unless thousands of people are on it, you’ll have a very hard time ever getting to that point.

To be clear, I’m a huge fan of bootstrapping. But it’s typically hard to take a startup idea and morph it (and its creator) into the bootstrapping mold. You should do it if you can though.

2. Use your seed capital to raise more capital

For convenience, let’s define seed capital as anything under $100k. The purpose of seed capital for a startup is not to build your product. It’s to raise the next round of capital. To do that, you need to prove that you have a team capable of building your product, and that people want what you’re building.

Essentially, this means that you use your budget to build a prototype or MVP, validate the idea with early users, and raise your next round of funding. Startups I work with that do this successfully raise $500k – $2mm to build out the actual product. Typically, most of the prototype they built to get to that stage is scrapped and redone.

This approach is very different from trying to build your full product. It means that you ruthlessly cut features, you don’t worry about anything related to revenue, you don’t try and make it pretty or fancy, and you remember that everything you build is disposable.

You try and build as little as you possibly can, because every line of code is a liability.

Do you know the fastest way to learn a language? The fastest way to learn anything, really? It’s to obliterate your sense of shame and make constant, embarrassing mistakes. It’s not enough to immerse yourself in the language and culture. You have to constantly be trying to speak it, making embarrassing mistakes, and getting corrected. If it’s not humbling, you’re doing it wrong.

The primary purpose of an MVP is learning. You’re not going to get millions of users from this version of the product, so the product doesn’t need to have all those cool features. In fact, you should be embarrassed by your MVP at this stage. You should feel that it’s too early to be showing people the product, that it’s not ready yet. Getting a raw, unfinished, ugly product out of your head and into the hands of users is the fastest way to learning what works and what doesn’t.

I’ll write more about the MVP process in a future article.

Conclusion

I know this article has been long, but I hope it’s helpful. The reality of startups is that they mostly fail, but it’s fun to work on them for the rare one that succeeds. I’ve been lucky enough to work on several startups that have succeeded, and a ton of “apps” that have done very well. If you need help navigating where your idea falls or how best to approach it, please contact me. I’d love to help.