Creating a business from scratch is never an easy endeavor, but some entrepreneurs might carry the scars from the high costs associated with startups while others become their own boss relatively unscathed with much less of a financial burden.
An analysis conducted by LendingTree, the online lending marketplace, of the U.S. Census Bureau’s 2016 Survey of Entrepreneurs (the most recent data available) found that 21% of entrepreneurs began their ventures with less than $5,000 in their business checking accounts.
“Those companies were small and local businesses,” said Derek Miller, senior research analyst with LendingTree. “They were especially in the construction industry and with people selling stuff online. They were not going to probably start the next big tech company with that kind of money.”
The financial services industry had the highest startup costs, especially those new companies that hold the securities or equity interests of other enterprises or oversee and manage the planning and decision-making process within other businesses. The average business in this industry requires about $440,740 in startup funding.
The second-highest startup costs involved utilities, an industry where startups are not especially common. LendingTree analyzed 1,097 utilities companies in the Census Bureau data set — and the average needed by startup utilities was $265,676. This might have been a bit broad as an industrial classification as LendingTree mixed electric power, natural gas, steam supply, water supply and sewage removal businesses into the utilities category for this study.
The food and hospitality industry had the third-highest mean startup costs. This may have been the broadest category for startups, ranging from modest family-owned diners to extravagant hotels and casinos. In this industry, the average startup costs exceeded $250,000.
At the other end of the spectrum, LendingTree determined that construction is the least expensive industry to enter: The average new firm only required an average of $67,349 to get started, while 50% of firms examined in this data study began with less than $12,390 on hand. Construction was also one of the largest industries with startups, encompassing approximately 300,000 reporting firms with combined startup expenses at $20.2 billion and most costs derived from raw materials used on projects, tools and equipment, labor, insurance, permits and licenses.
Also on the low side regarding startup costs were employment agencies, janitorial services, waste collection and management firms and travel agencies as entrepreneurs in those fields needed an average of $69,509 in startup funding. This is primarily because businesses usually have far fewer startup requirements in these areas. Janitorial services find most of their initial funds going to supplies and labor costs.
Professional, scientific and technical services startups also have relatively low startup costs — the average amount is $72,046 — but office space and equipment are frequently the greatest up-front expenses here.
The survey did not offer a geographical consideration of where the bulk of startups are beginning. LendingTree’s Miller acknowledged that some of the most famous stories of humble startups involved lowly California garages that offered the first setting for world-dominant brands including Google and Apple. But he also forecast that the high-tech startups of tomorrow might be taking root in less-expensive states.
“Tech companies are moving out of California due to the high costs,” he said. “We may see Midwest cities getting their business.”