Are you wondering how long before successful tech startups start making money? It is a legitimate question if you are thinking about either having your own startup or investing in one.
The actual answer to this question is that it depends on many factors, including location, management, and the core business plan. Although there is no one true answer, a successful tech company will usually need to wait at least 2-3 years before seeing any kind of profit.
Although 2-3 years is the minimum you will need to profit, most people believe it will take any startup much longer than that. We are talking 4-5 years minimum, but this is usually in the 7-10 year range.
How Are You Measuring Profitability?
As we have already mentioned, when trying to get an answer to how long it will take before a tech startup starts making money, you will need to examine many factors. Besides the factors on what may or may not make your business successful, you also need to identify what you are asking.
People mean three different things when they are asking when a new startup will make money. So keep on reading for the three different people/entities you are trying to turn a profit for and determine which one (or all three) you are really wondering about.
The principal or principals is the person or people who own the business. If you are going to be a sole entrepreneur, then you would be the principal. If you and a partner will be starting a business together, you will both be principals. When you are inquiring on how long it will take for your startup to make money – is this your biggest concern? Do you want to know when you will make money?
It is entirely possible that you can make money, and the business makes none. For instance, let’s say you are starting a tech startup by yourself. You decide that you will pay yourself $52,000 a year until profit dictates more, giving you a weekly salary of $1,000. Suppose at the end of the first year, your business clears exactly $52,000 after other expenses. In that case, you make that money personally, but your salary is just another business expense.
If your business cleared $40,000, you did not even make enough to cover all costs. On the other hand, if your business cleared more than $52,000, you might have made a profit. Of course, if your business earned $75,000 and paid yourself a salary of $52,000 but then gave yourself a year-end bonus of $23,000, you still made $75,000 personally. Still, the business itself did not earn anything.
So as you can see, if what profit means to you is how much you made, you can make money right away, but that does not mean you have a healthy business.
Frequently when people are doing a startup, they have investors. Sometimes people can liquidate some of their own assets or even choose to get a business loan (which still needs to be paid back). However, starting any type of business can be an expensive exercise. Many startups can not secure the capital they need without other types of investors.
If you have investors, they expect something back. Two of the most popular types of investors before a business gets off the ground are personal investors and angel investors.
A private investor is usually someone you already know with whom you have a close and well-established relationship. These typically consist of family, friends, and close acquaintances.
Angel investors are people with the money and resources to invest in small businesses and startups. To be called an angel investor, they usually earn more than $200,000 a year or have a net worth of more than 1 million dollars.
These investors will usually invest in multiple businesses across many different sectors. This is because they understand that most small businesses and startups fail. Still, if they have a few investments that pan out, those investments will cover all their losses and more.
With personal investors, you will set up some kind of payment plan or investment return. These plans may have more leniency and better terms for you because of your personal relationships.
However, angel investors do not have any personal relationship with you. They are there because they believe in either the business model or your management skills. They are taking a bet on you, and they want it to pay off.
When it does pay off, they will expect a payment, and it will not be cheap. Typically angel investors will expect to receive 20 – 25% of your profit. Depending on how your contract is written, you may have a specific timeline to get there.
For instance, your contract might state that no payments are expected in the first 3 years unless your profit in any one year exceeds $100,000. But make no mistake, they are looking for a return on their investment.
Although you may be able to pay yourself or your partners the first year, it is unlikely that you will see a huge profit for your investors in the first three years. If your tech startup becomes successful, the excellent profit years will probably not start until year five.
Making a profit on the business itself, especially a significant flow of cash, takes the longest. Let’s say after the majority of business expenses except for your salary and investor’s compensation, your business clears $500,000 annually.
A half-million is a nice dollar figure, but you still have investors to pay. If your salary is $75,000 and your angel investor is getting $125,000 (25% of your $500,000 profit), that leaves you with $300,000.
Now that sounds great! However, some of that money will be earmarked for cash flow for upcoming expenses as a growing business. If you are indeed growing, you may need to hire additional people (and pay their salary and benefits), and let’s not forget that this is a tech startup. This means you will need new equipment and the latest technology at all times.
Depending on how much all of this will cost you, your $500,000 went down to at least $300,000, but likely closer to $100-200K.
So, as you can see, the business does take longer to gain profit. Still, there are also many expenses that will severely cut your profit margins.
A Typical Timeline of Business Success
To further understand when you will see money at all, let alone a sizable profit, you will need to understand the basic timeline of a typical tech startup.
Your pre-launch can be anything from a few months to a few years. During this time, you have come up with your seed idea. Then, you have formulated your business plan, lined up investors, and took care of any legalities needed like licenses, permits, etc.
How long this time takes is different for everyone. One person may take a few weeks to formulate a business plan; another person may take a few months. If you do not need any financial assistance or very little, this time could pass quickly. However, if you need significant money and resources, obtaining the right investors can be a time-consuming process.
During this time, you are not making any money, but you are also not spending a lot.
The first year is a time to learn how to run your business. It comes with many challenges you did not know you would face but a ton of happy successes. It is exciting to get your website, to incorporate, to land your first client, etc.
You may make some money in year one but probably not a lot. However, you will learn some important lessons such as:
- Money management.
- How much your overhead is and ways to reduce it.
- Areas you can not skimp in (examples could include research and development, customer service, public relations, advertising, employee training).
Congratulate yourself if you made it to year two, as many startups do not make it past the 12-month line. However, you have realized your profit is not where you want it to be, and you are exhausted. Being an entrepreneur is a tiring experience, but it will eventually pay off.
Year two can be a pretty scary point. You are not as excited as you once were, and your investment funds are beginning to run out. You now realize how hard this is, but you need to keep going.
Year two is about hard work and self-reflection. Is this working? If not, what changes can you make? Do you have customers? What about repeat customers? Is there some way to change your business model to make it better without changing the whole branding and vision of the company?
You may start to see signs of life, there is a little profit. Now is the time to figure out what works and learn how to scale up your business model to make a more considerable profit.
This is usually the make it or break it point for people. You are probably either breaking even or making a small profit. But it has been three years. So you are exactly where most people are, but it can be difficult for people to accept this when they foresaw such high profits in their future.
This is not to say that it can not happen – it is just unlikely to occur by year three. Now is the time where you need to make the call. Are you going to continue to work on growing your business and making it a success, or have you had enough?
Year Four and Hopefully, The Rest of Your Life
If you make it to four or more years, you should be really proud now. You have found a way to break even or make a profit in a very competitive market. You now should have made a name for yourself, at least locally, with name and brand recognition.
People trust you enough to give you repeat business or refer you to other people who could benefit from your services.
If you look up other success stories of tech startups, you will see that most of them were in at least year four before the profits starting rolling in. The reason is that it takes a while for a new business to figure out what works and what does not and refine all your processes.
Tools Needed to Survive in the Tech World
You will need to consider that we are discussing how long before a successful tech startup starts making money. This is the tech industry, not just any business sector. This comes with its own set of challenges that you need to be aware of.
To drive this point, let us compare it to starting a non-tech-based business. Let’s say I decide to start a bakery. Once I obtain my initial startup costs, I will not need a ton of upgrades, and when I do, they will not be required often. First, however, I need a place to sell my goods, equipment used for baking and packaging, money for employees, and supplies.
My equipment may break, or I may upgrade. Sure, I need to stay on trend and offer what people want, but mostly that will not significantly change my business model or cost a lot of money.
The tech industry is very different. New ideas age quickly. Some tech startups blow up, whereas others do not stay with the latest technological advances or change with the market. As a result, they lose their footing, becoming a shell of who they once were.
It is imperative to understand that you will need to stay with the times and be ready to embrace change. This is not a static field, and to survive in it, you will need to be highly adaptable.
How long before successful tech startups start making money? That was the original question. Well, it depends. However, you should expect to put in at least 2 – 3 years before you are either comfortably breaking even or making a considerable profit. It will be 3 – 5 years in most cases before you are making a noticeable profit. If you make it to 7 – 10 years, you should be well-known and have a recognizable brand, and you may be doing financially well at this point.