The true cost of trying
The median seed round in the US is $1.4m. This represents the median cost to get an idea, build a development team and test it. Which sounds like a lot, but it makes sense when you add up the cost of hiring a product team, designers, product managers, mobile and backend developers, getting a swanky office in Mission District or Chelsea, getting a marketing strategy together and going through the normal forming-storming-norming-performing model of group dynamics in your first 12 months.
The median cost to build a startup in the US is $1.4m
But. 50% of these companies will fail to return the $1.4m investment and 40% will only just manage to give investors their money back. This means that in 90% of cases, the startup is a failure. And 42% of the reason why startups fail is due to product-market-fit, 17% specifically on the technology. Nailing the product is crucial to get that idea to market – so why is it so hard?
It takes time to build a team
I spent 10 years in the Royal Australian Navy as an Officer prior to jumping full-time into startups. And even at 10 years, I was still learning team dynamics and improving on leadership skills. A highly efficient and operational team takes time to build – you can’t just throw 10 random people together in a room and expect them to be performing at optimum efficiency right away. This delay, or as one of our staff calls “the family factor” is the dysfunctional behaviour which exists as a team gets to know each other (storming). But your team shouldn’t aim to be a family, you should be aiming for an ‘elite sports team’, and elite sports teams train for years to get to peak performance.
High performance team with high performance equipment
So we asked ourselves; how could we mitigate this risk? How could we reduce the cost of failure? How could we start each business with an elite sports team? And how could do all of this for under $50k?
The result was a concept to have a highly trained team work to get the idea off the ground – to kick off the premiership. And once the idea was proven and could make money or raise on its own merits, we have a process to slowly transition the team to employ their own players, keeping the level of intensity high and most importantly, consistent.
The median cost to build a startup at BlueChilli is $33.8k
We achieved this with our technology frameworks ChilliSource and FreCL. A stable set of frameworks designed to test ideas quickly, enable them to make money, scale and provide a strong foundation for future development with integrated recruitment and training. Combined, these frameworks enable our entrepreneurs to rapidly launch a scalable working commercial product with a professional sports team, check that the idea has merit, raise capital and then employ their own team to carry the flag forward.
The result? The median cost for the BlueChilli team to launch a startup is now US$33.8k. Whilst this isn’t an apples for apples comparisons because BC also takes an equity stake of median 13% and offers value in the accelerator, capital raising, business mentoring in addition to the build but it’s still an instructive comparison. And 50% of our startups have raised capital, with around $30m raised in total. Just in Australia.