(Note: reposted from Planning Startups Stories)

Every startup has its own natural level of startup costs. It’s built into the circumstances, like strategy, location, and resources. Call it the natural startup level; or maybe the sweet spot.

1. The Plan

For example, Mabel’s Thai restaurant in San Francisco is going to need about $950,000, while Ralph’s new catering business needs only about $50,000. The level is determined by factors like strategy, scope, founders’ objectives, location, and so forth. Let’s call it its natural level. That natural startup level is built into the nature of the business, something like DNA.

Startup cost estimates have three parts: a list of expenses, a list of assets needed, and an initial cash number calculated to cover the company through the early months when most startups are still too young to generate sufficient revenue to cover their monthly costs.

It’s not just a matter of industry type or best practices; strategy, resources, and location make huge differences. The fact that it’s a Vietnamese restaurant or a graphic arts business or a retail shoe store doesn’t determine the natural startup level, by itself. A lot depends on where, by whom, with what strategy, and what resources.

While we don’t know it for sure ever — because even after we count the actual costs, we can always second-guess our actual spending — I do believe we can understand something like natural levels, somehow related to the nature of the specific startup.

Marketing strategy, just as an example, might make a huge difference. The company planning to buy Web traffic will naturally spend much more in its early months than the company planning to depend on viral word of mouth. It’s in the plan.

So too with location, product development strategy, management team and compensation, lots of different factors. They’re all in the plan. They result in our natural startup level.

2. Funding or Not Funding

There’s an obvious relationship between the amount of money needed and whether or not there’s funding, and where and how you seek that funding. It’s not random, it’s related to the plan itself. Here again is the idea of a natural level, of a fit between the nature of the business startup, and its funding strategy.

It seems that you start with your own resources, and if that’s enough, you stop there too. You look at what you can borrow. And you deal with realities of friends and family (limited for most people), angel investment (for more money, but also limited by realities of investor needs, payoffs, etc.), and venture capital (available for only a few very high-end plans, with good teams, defensible markets, scalability, etc.).

3. Launch or Revise

Somewhere in this process is a sense of scale and reality. If the natural startup cost is $2 million but you don’t have a proven team and a strong plan, then you don’t just raise less money, and you don’t just make do with less. No — and this is important — at that point, you have to revise your plan. You don’t just go blindly on spending money (and probably dumping it down the drain) if the money raised, or the money raisable, doesn’t match the amount the plan requires.

Revise the plan. Lower your sites. Narrow your market. Slow your projected growth rate.

Bring in a stronger team. New partners? More experienced people? Maybe a different ownership structure will help.

What’s really important is you have to jump out of a flawed assumption set and revise the plan. I’ve seen this too often: you do the plan, set the amounts, fail the funding, and then just keep going, but without the needed funding.

And that’s just not likely to work. And, more important, it is likely to cause you to fail, and lose money while you’re doing it.

Repetition for emphasis: you revise the plan to give it a different natural need level. You don’t just make do with less. You also do less.

I was the planning consultant to Apple Computer’s Latin America group from 1982 until 1991 or 1992, the end of the relationship being a bit hard to define as I was called on steadily more by Apple Japan and less by Apple Latin America.

The challenge came in the spring of 1985. The annual business plan was done every Spring, turned into management in June and then discussed and revised and resubmitted and eventually accepted in July. In April of 1985 I had been the consultant for that process for four years running when Hector Saldana, manager of the group, said:

“Tim, yes I want you to do our annual plan for us again this year. But only on two conditions: first, I want you to stop working for other computer companies. Second, I want you to take up a desk in our office, come every day, and sit here and see us implement the plan.”

Happily, he also had some good news related to giving up other competing companies as clients: “And, if you agree to do this, I want to contract you for all of your hours for the next year, and at your regular billing rate.”

The condition of giving up competing clients was difficult for a single person business. What if Apple had problems, or changed its policy regarding consultants? What if Hector got promoted or fired? Where would I be then, if I had given up other business relationships.

That’s not the real point of the story, although it does relate to planning as you go. That certainly wasn’t part of my business plan for my business, but it was a classic example of changed assumptions. We talked about it at home at length, and decided to go ahead with it. However, we also modified the plan we had going related to efforts to generate new leads and new business: we would focus that effort within Apple itself, different groups that didn’t talk much to each other, to reduce risk of having two many eggs in the single Apple Latin America basket. The plan was modified for cause, to accommodate changed assumptions.

The problem of implementation, however, forced me to consider the difference between the plan and the results of the plan.

There was some history. The previous year or two had been the time of “desktop publishing” for Apple Computer. Desktop publishing, which we now take for granted, started with the first Macintosh laser printer in 1985. It was a huge advantage for Apple in competition against other personal computer systems.

Our plan for fiscal 1985 had been to emphasize desktop publishing in most of our marketing efforts. And it didn’t happen. While we talked about desktop publishing in every meeting, the managers would go back to their desks, take phone calls, put out fires, and forget about it. They didn’t intend to, but they’d had so much emphasis on desktop publishing that it seemed boring, old hat. Multimedia was the thing.

So, faced with the implementation challenge, I created what became the strategy pyramid to manage strategic alignment. We ended up with a relatively simple database of business activities. Collaterals (meaning brochures and such), bundle deals (software included with the hardware at special bundled prices),advertising, trade shows, meetings and events, all were tied into a system that identified what strategy point they impacted, and what tactic.

So during that year, as business went on, we were able to view actual activities, spending and effort, divided by priority. We set more budget money for desktop publishing activities than any other. During the review meetings, we compared actual spending and activities (the beginning of what I talk about as metrics)  to planned spending and activities. And over time, with pie charts and bar charts to help, we were able to build strategic alignment. What was done was what the strategy dictated.

The plan-as-you-go implication was that this didn’t happen just because it was in the plan. It took management. There was a plan review schedule with the meetings on the calendar way in advance, and for every meeting I was able to produce data on progress towards planned goals. The managers discussed results. Plan vs. actual metrics became important.

When things didn’t go according to plan, the meetings would bring that to the surface. Managers would explain how the assumptions turned out wrong, or some unforeseen event — we had good results as well as bad results — and we would on occasion revise the plan.