Airplanes need a strip of smooth ground to land or take off. The length of that strip, the runway, depends on the airplane’s size and weather conditions. When these are not at least relatively favorable, pilots may fail to prevent a serious runway excursion accident. In the same fashion, startup founders are, most of the time, faced with equivalent unfavorable conditions; and are equally worried, when it comes to their “startup runway”.
Though the term is loosely used to draw a parallel between these two circumstances, there are some core differences. Let’s find out more.
Startup runway: reversible and irreversible scenarios
Now, running out of money is not exactly an accident that happens out of the blue; especially if you’ve managed to raise an important amount of it, so far. Most of the time, it’s a matter of bad management, thoughtless decisions; or, much worse, an extreme top-down approach, back when you started building your company. For example, the market assumptions you initially made, may have never been validated the right way. These mistakes can lead to other misinformed practices, keeping you waiting for the forthcoming customer revenues to increase. All, in vain.
For the context of our discussion, we’ll stick to the manageable scenarios mentioned above. Mostly because that’s when there are still things you can do, regarding your startup runway. But, even so, the risk of running out of money still exists. And, apparently, it may have serious repercussions throughout your business. It could mean the end of it.
According to CBInsights:
running out of runway is the second most likely reason for startups to fail.
Isn’t it obvious that managing and extending your startup runway should be your top priority if you’re the one wearing a CEO’s hat? No question about it.
With this purpose in mind, let’s find out more about it.
What’s a startup runway and how can you effectively manage it?
As mentioned above, startup runway — or funding runway — as it’s called, is one of the most important metrics you’ll have to keep tabs on, as a startup founder. It’s the number of months you can seamlessly sustain operations, till you run out of money. And, running out of money is indeed in the cards, especially in the early days of your endeavor. That’s when you bank on auxiliary financial resources, rather than customer revenues, to cover your business expenses.
Before we focus on the things you can do to make the most out of this kind of “grace period”, let’s take a quick look at how you can calculate the months of seamless operation left for your startup; the runway. Make no mistake, that’s exactly what you’ll have to do; you need to make sure you know exactly how many months you have left, at any point in time. We’ll talk about why this one is really crucial, later.
How to calculate your startup runway
As you probably guessed, calculating your startup runway has to do with your cash balance or your initial capital, your revenues (if any), your expenses; and how these change within a particular period of time. Though math calculations are simple, what needs careful attention is you being really diligent in writing down all of your expenses, recurring or one-off payments. And most importantly, being consistent with repeating this calculation from time to time, so that you know exactly where your startup is heading, in terms of money, at any time.
There are different formulas as to how you can calculate your startup runway. On our part, we’ll stick to this following series of steps:
First you need to calculate your spending, per month, as this will help you get a first good feel on your startup’s overall financial health. Though you may believe that “more or less” you’re aware of your startup’s expenses, there may be cases you’ll be taken by surprise, as to how many things simply go unnoticed.
So, try to focus on your spending rate; and, more specifically, on your gross burn rate. Note here that you can calculate the burn rate per month, per year or even per week. In fact, there are companies that use weekly monthly gross burn rate; especially when they have high operating costs or when they are undergoing an unstable financial period. Yet, the most commonly used metric is the monthly gross burn rate.
So, in a period of a year you’ll have:
Gross Burn Rate = (Original Cash Balance — Remaining Cash Balance) / 12 months
Now that you know exactly the amount of cash you spend per month, you need to calculate the difference between monthly cash in and cash out. It’s the amount of money you lose — or perhaps subsidise — per month.
Net Monthly Burn = Gross Burn Rate — Added Cash
This metric is the most indicative of your growth potential. And, as expected, it is exactly this information that investors will be more than interested to know all about. Additionally, profitable startups, more often than not, have a negative burn rate. That’s because their revenues exceed their operating and other expenses.
Though both the metrics explained in the previous steps help you have a good feel of your startup financial health, it’s your startup runway that reveals the ultimate truth. And what’s that? When exactly you’ll run out of money. So here we are:
Startup Runway =Cash Balance / Net Burn Rate (months)
Let’s assume that you’ve calculated your startup runway and you want to take the right steps, working in your company’s best interest. What should you do?
Taking action based on your runway
It all boils down to whether your startup runway is small — and thus crucial decisions need to be made — or big enough to give you the leeway to take advantage of further growth opportunities. So here we are:
The runway left is less than a year
The year here is provisional, as things may be even worse and you may even have less than that. When you’re running out of money in next to no time, you need to cut down on unnecessary expenses; and/or make an effort to raise capital, in order to stay alive. The former advice includes actions such as downsizing offices and other operational expenses; or even making adjustments regarding your payroll expenses. For example, it could be your decision to further automate processes; and even decide to make changes as to employees’ roles or even make some layoffs. As for your fundraising efforts, given your financial state, Y Combinator offers some really insightful tips on how things work; and how investors behave in such cases, as well.
When your runway extends beyond your expectations
When your startup runway calculations not only give you relief but also make you realize that you’re actually doing really great, then do the best you can out of this condition. That is, make hay while the sun shines. And what you can actually do is get the most out of this “grace period”. More specifically, all you want to do is to not let these financial resources go to waste without bringing additional benefits to your startup. That is, spending cash on marketing, sales and growth operations, along with investing on talent acquisition. These are actions that, if done in a balanced way, they further improve your startup’s financial state. This way not only will you further extend your startup runway, but you’ll actually see your initial plan to fruition; to bring a healthy and growing company into being.
Being vigilant and keeping a watchful eye on your startup runway should be one of your top priorities as a startup CEO. And that holds true both in case you’re struggling to build up your startup and in case you’re in a state of growth.
Our take on the startup runway
Well, it’s no other than the fact that we do our best to help our startups achieve early profitability. And that, as expected, is what makes the startup runway discussion kind of irrelevant. Doesn’t it?
However, we need to admit that running out of time is, indeed, the most significant problem startups face; and, consequently, fail because of it. From our perspective, it all stems from the fact that startup leadership — CEOs, predominantly — may spend up to 90% of their time in fundraising efforts. That is, rather than focusing on core priorities such as customer and product development. This is something to be carefully balanced. And, one should keep in mind that, in the startup world, there is the right time for the right thing.