How Pre-Revenue Tech Businesses can optimize their Spend to get to their next milestone

Pre-revenue startups often seem like a risky investment for venture capitalists, as the MVP model is yet to be brought to market. But in reality, providing fund

Pre-revenue startups often seem like a risky investment for venture capitalists, as the MVP model is yet to be brought to market. But in reality, providing funds during this stage is essential for businesses trying to turn their idea into an MVP. A well-planned MVP development not only requires cost optimization from sales and marketing campaigns but also either inhouse or outsourced development teams to bring it to fruition. And with sound estimates of the potential costs to be incurred for product development and preliminary market testing through clear financial projections and understanding of expenses, pre-revenue startups can make sure they get the most out of their MVPs while still keeping their business on track.

Why should the business build a SaaS solution?

Many of the issues the modern IT sector is facing are resolved by SaaS software. Along with the above-mentioned benefits, ground-breaking SaaS technologies like Salesforce, Grammarly, GSuite, Adobe Suite, Slack, Atlassian, and many others have revolutionized the way organizations operate in the modern world. Creating a cutting-edge SaaS solution is the ideal technique to assist your clients in changing their business practices. Furthermore, SaaS was the preferred choice for more than 40% of entrepreneurs, according to Associaço Brasileira de Startups. According to Nasscom, the SaaS sector in India expanded by 75% between 2018 and 2020. These figures strengthen the SaaS use case and show how profitable it is for business owners. Businesses that would otherwise need to close their doors are now able to grow and function thanks to SaaS software.
The on-demand food market, for instance, would not expand at the same rate as it did during the pandemic. Without SaaS solutions, the healthcare sector would suffer greatly and the education sector would be unable to function. SaaS software had a favorable effect on every aspect of the industry both during and after the pandemic

Pre-Revenue Investment

Pre-revenue businesses that focus on turning a SaaS Idea into an MVP Startup requires research, validation, testing, a solution blueprint and proposal, and execution. The investment in MVP is determined by a variety of factors, including whether,

Is the product development team internal or external?
What is the size of the product development team?
Is the MVP so complex that it requires longer development time and effort from the product development team?
What is the intended sales strategy, inbound or outbound? Or both?

In this post, we discuss how pre-revenue companies need to allocate their costs and make good use of investments made.

SaaS MVP Cost allocation

Before spending money on full-scale development, the majority of startup founders and business owners want to produce a minimum viable product (MVP). The first step before scaling a startup or project is to create a good and bug-free MVP. Budget management and prudent financial decisions are crucial success elements. Quality cannot, therefore, be sacrificed. However, if the company does not prepare in advance for the MVP cost, it may get carried away and quickly go over the budget cap (and financial risks are always painstaking).

Inhouse Product team

An MVP development is predominantly done in-house to protect the idea and the technology aspects. In-house development allows the entire team to be fully engaged in the project leading to greater synergies. However, the cost of having an in-house team is quite high. When you hire full-time developers, you must pay for holiday pay, hiring costs, and a variety of other expenses.
A typical breakdown of an MVP product team would be like the below. However, depending on the complexity of the MVP the below figures would be substantially higher due to additional headcount.

Developers	Headcount	Estimated cost per month - lower limit	Estimated cost per month - upper limit
Units	#	USD	USD
Full stack developer	1	9,200.0	11,040.0
Designer	1	3,600.0	4,320.0
Tester	1	4,100.0	4,920.0
Project Manager	1	7,500.0	9,000.0
Total cost per month	4.0	24,400.0	29,280.0

In-house development will thus cost between $25k and $35k per month. If the MVP development period lasts 9 to 18 months, then the cost will range between $330k and $400k.

Outsourced Product Team

Outsourcing MVP development can still get the business the right results since you gain access to experts from all over the world. It will also save you a significant amount of time and money that would otherwise be spent on hiring, bonuses and training.
For a typical project, you would need to hire an agency that offers development services with a full-time team. Let's consider the rates of freelance software developers.

Developers	Number of headcount	Estimated cost per month - lower limit	Estimated cost per month - upper limit
Units	#	USD	USD
Full stack developer	1	6,000.0	7,200.0
Designer	1	5,000.0	6,000.0
Tester	1	2,500.0	3,000.0
Total cost per month	3	13,500.0	16,200.0

Outsourced product development will cost between $14k and $16k per month. If the development period lasts 9 to 18 months, then the cost will range between $180k and $220k.

Sales & Marketing & other expenses

Once the MVP is ready and can be tested with the early users of the product, a startup focuses on MVP Campaign and acquiring first few customers. An MVP marketing plan depends on the purposes of the product and budget.
The most cost-effective way to market your MVP is through inbound marketing including Social media posts, blog posts, email newsletters, and networking. Another form of advertising is outbound marketing, which include Facebook ads, Google AdWords, and Display Advertising, Cold outreach to promote content.
The outbound marketing necessitates the use of account executives, and marketing associates. Once the customer has subscribed, it needs support personnel to maintain a healthy customer relationship and to upsell or expand existing products. The cost of application maintenance, subscription costs, hosting, and any license fees will be incurred on an ongoing basis. The estimated costs are provided below.

Cogs	Number of head count	Estimated cost per month - lower limit	Estimated cost per month - upper limit
Units	#	USD	USD
Sales cost	3	6,250.0	7,500.0
Marketing Management	2	5,245.0	6,294.0
Application maintenance	2	3,500.0	4,200.0
Cost of subscriptions	-	1,650.0	1,980.0
Hosting	-	5,050.0	6,060.0
Licensing fees	-	2,300.0	2,760.0
Total cost per month	7	23,995.0	28,794.0

Sales and marketing, as well as other sales costs, will range between $24k and $30k per month. The total costs range between $526k and $630k for 9 to 18 months.

Summing up:

The pre-revenue stage lasts 9 to 18 months and costs close to $1million when done in-house, while outsourcing costs about $750k to $800k.

	Development - Inhouse vs Outsource	Average Product Development cost	Average Post-Development cost (i.e., MVP sales, maintenance)	Total cost
Pre revenue	In house	362,340.0	579,002	941,342
Pre revenue	Outsource	200,475.0	579,002	779,477

The MVP assists investors in evaluating commercial aspects, analyzing market potential. By developing an MVP, founders can improve the likelihood of getting access to smart capital and set the business up as investment-worthy. A minimum viable product is required for a seed round (MVP) and also to collect feedback for future product development. Investors frequently view companies that do not have a minimum viable product (MVP) as too early and too risky. By optimizing the spend for initial product development and sales and marketing, pre-revenue tech businesses would be better placed to extend their cash runway while a better deal is identified and struck.