What is runway?
If you’re the founder of a startup, managing runway is always on your mind. It’s a question you hear all the time, from investors, colleagues, and likely yourself.
Runway refers to how long you have until your company runs out of money if income and expenses remain steady. It’s called runway, because it likens to an airplane taking off from the runway—If there’s not enough of it—trouble will ensue.
Here’s a simple example: A company that has $100,000 in the bank, is not currently generating revenue, and spends $10,000 per month has a 10-month runway. During these 10-months, normal business activity should occur. To expand runway, the company will need to generate revenue and achieve enough revenue to offset their burn rate.
Running out of money is a leading factor as to why business fail.
How to attribute it?
How do I calculate my runway?
- Define your gross revenue
Your gross revenue is the sum of all the deals that have already closed. It’s also OK to add in
deals that you are confident will close. But don’t get overzealous here: a realistic assessment will
serve you best.
- Document your expenses
Your expenses are all the costs that are going out the window. Add up all dollars you’ve spent
(this can include payroll, rent, equipment cost, other subscriptions, and one-off
purchases—avoid leaving anything out).
- Calculate your net cash burn
This number shows how much money you’ll be burning in a net loss scenario. It’s calculated by
subtracting the expenses from the revenue.
[Net cash burn = Revenue – Expenses]
- Determine your runway
Divide the cash in your bank by your net cash burn. This will show you how much runway you
have left
What if I’m expecting an increase in expenses in the future?
Runway refers to a fixed amount of time, though that’s rarely the case. You’re likely anticipating a few different costs. It’s a good idea to include those in your runway (add them to your expenses calculation). Be conservative, you don’t want to run into surprises when it’s too late to adjust.
What about an increase in revenue?
Leave those out. You can recalculate your runway when you get that new revenue. Don’t jump the gun now.
How much should you raise to support more runway?
Every situation is unique. Generally, you should consider the following goal for runway length:
- From Seed to Series A should be 12 months
- From Series A to Series B should be about 15 months
- This data is according to this CBInsights report
You will often hear investors recommend a runway of 18 months to account for any “headwinds” you come across. A lot of plane references, huh?
You can find more conservative estimates from the folks at Radicle labs. They suggest runways of 18+ months. Simply put: more runway allows you to manage more unpredictability.
What are the common mistakes I should avoid?
There are worlds where you can raise too little, just enough, and too much capital. Raising too little will cause obvious issues: you will run out of money too soon, unable to achieve your goals. Raising just enough or too much capital may indicate that you weren’t aggressive enough in your execution or that you gave up too much equity to investors.
Raising too little
Even if you execute well with the dollars you raised, you will probably still find yourself in need of another raise sooner than you hoped.
Raising just enough
Boom. You just raised enough to have a runway for 18 months post-seed. Let’s say you then develop your
product for 10 months. You then get back on the fundraising trail to raise more. This takes two months. Then, that raise takes another month or two to hit your bank account. This leaves you with only about two months left to operate. Consider adding a small buffer to your runway and your raise amount.
Raising too much
There’s always a temptation to feel secure with the money in your bank account and build a fund for rainy days. Raising more than you need could raise investor’s expectations of you because the valuation is high. That sounds great in the short-term but poses risk for the next round going up. The first question that will be asked is if you delivered on the valuation you got, making the round trickier. Conversely, you can give more equity away to raise more funds. In that case, you may be getting a bad deal for yourself and future investors. Making a mistake on when raising funds is common. Always keep an eye on your burn and be ready to take steps to adjust as needed.
How can I prolong my runway?
Stay on top of your cashflow
Consistently monitoring your cashflow will allow you to become aware of any changes. At Mighty, we look at our financial standing on a weekly basis. This way, we can have discussions about changes and address potential challenges before they become larger issues.
Calculate your cash flow with this simple equation:
[Cash flow = Income – Expenditure]
Income includes sales, investments, bank loans, grants and other types of funding. Expenditures includes team salaries, operational costs, tax and VAT, repayment of loans and more.
Shoot us a note if you have any questions. <Contact us button>
Reduce your expenses
You can get more efficient with your capital simply by taking a look at your expenses and deciding what to cut. Sometimes there are simple decisions: can you consolidate two offices? Are you paying for a software tool that no one is using?
Other times it can take some more proactive thinking: avoid unnecessary hiring, examine work that you can automate, take time to decide on new tools to ensure they’ll fit.
An overall review of your expenses can highlight redundancies or issues that can lead to quick expense cuts. If you’d like some help here reach out to our team [sales email]
Handle your receivables
There are likely outstanding invoices of yours that haven’t been paid. Outstanding receivables is a common issue for a lot of companies. It’s been reported that 24% of a company’s monthly revenue is tied up in outstanding invoices—that’s a lot of money that should be in your bank!
It’s standard to have a period in which your customers should pay their invoices. This can range from 30 to 90-days, depending on your industry. Whatever your period is, your business should be able to operate without that income during that period, plus, with a buffer on top of it. It will almost never be the case that you won’t have outstanding AR. Well-defined payment terms will help your customers meet your payback periods.
Create an emergency fund
Rainy days happen, you should have a plan for when one comes along. A rainy day can come in the form of the unexpected need for resources (new tool, consultant hire) or expenses could rise when you least expect it. Unpredictability is part of the game. Make sure you’re financially ready for whatever comes your way.
Your emergency fund should give you minimum coverage of three months of expenses. Max, your emergency fund could cover up to a year.
Launch from your runway
The long-term goal of runway, raising rounds, and tightly managing cashflow is to get to your end goal:
profitability, an exit, or an IPO featured to some extent. Taking our outlined runway advice can seem like a
daunting task. Don’t expect yourself to do it alone. Whether you hire folks who are good at this or decide to bring in an outside resource to assist, managing runway is very possible.
Mighty Startup has been helping startups manage and extend runways in for years. We can implement multiple methods to help, including raising funds from investors, acquiring loans from banks, and more. Feel free to set up a call with one of our experts to learn more.
