Lesson 6: How Much Runway?

How Much Runway Do I Need?

Critical to your success as an early-stage start-up founder is knowing how to accurately calculate your runway. Running out of money is the second most common reason start-ups fail, so you always want to know of how many months of runway you have, and calculate it effectively based on expenses, growth, and leaving about 30% of room for any unforeseen issues.

Some experts say you need at least twelve months of runway. This means you will have 3-4 months to focus on product and team building before starting the cycle all over again. Other experts say you should have an 18-month runway to allow for major milestones to be reached, such as product launches or customer implementations. In the end, it really depends on how much you can raise at a time without giving away too much equity and losing control of your business. 

It’s also important to remember that valuation at the early stage is just what people will pay for your company, not what you feel you are valued at. So, if you can’t raise at one valuation, it’s okay to lower your valuation. There are cases where increasing your valuation will lead to more funding. I know it’s crazy, but markets are based on “perception” and rarely on results.

A Delicate Balancing Act

During fundraising, you need to keep your start-up advancing forward and possibly expanding. It can be a delicate balancing act and your time needs to be split between raising, recruiting, and retaining awesome talent, PR, and building your product. If you don’t make progress in any of the above, you may not hit milestones or gain enough revenue or traction to raise your next round. 

And if you stay too focused on day-to-day operations, ignoring the reality of raising funds to continue your business beyond available funds, your company may not stay afloat as your runway vanishes, despite your development of a great product or key new hire or first signed customer contract. Finding out you do not have the runway to capitalize on your own success is maddening and tragic.

Do this Calculation for Yourself

You calculate your runaway by taking your beginning cash balance and dividing it by what we call Net Burn Rate, however first you need your Gross Burn Rate.

Gross Burn Rate

Gross burn rate is the total amount of money you are spending each month, not including income. If you look at your expenses for a month, that is your gross burn rate. Your gross and your net burn are the same if you have no revenue or additional capital coming in. 

Net Burn Rate

Net burn is easy to calculate by taking your bank balance at the beginning of the month and subtracting out the ending balance. That accounts for all incomings and outgoing. However, you should adjust for investment capital, as that is neither recurring nor reliable. This will give you a clear picture of your monthly capital needs and you can plot out your runway.

Net burn rate, going forward, is also calculated as (gross burn rate – income). To get your runway length, just divide your current capital by the net burn rate. 

For example, if you have $500,000 in the bank, divide it by the net burn rate of $35,000, and it equates to 14 months of runway. Now to be extra careful, always make sure you add in projected growth cost and for any issues- so we recommend ALWAYS taking 30% off as an insurance policy. 

In this case, you would only have 10 months of runway and would need to close a few more checks before closing your raise. The thing you must realize is that income is not guaranteed as well as that you can’t see the future so planning for some backup is critical. 

You can also work to reduce your net burn rate to give yourself more runway. For example, you can outsource a role or department, or hire interns to help with development efforts. You can also utilize stock to negotiate salaries down for every current and future employee.

Here are a few tools and resources that you can check out to help you with calculating runway:

https://startuprunway.io/

https://founderscpa.com/calculating-burn-rate-runway-startups/

https://pilot.com/blog/burn-rate-calculation-startup-runway-calculator/

Tips for a Clearer Picture of Your Runway

Don’t forget to include your expected expense growth rate, and vice versa- your revenue growth rate. This can be tougher to figure out, but if you expect an increase in expenses of 5% per month because of growth, you can get a clearer picture of the runway. It is unlikely you will spend the same amount of money or make the same amount of revenue for 12 months.

We explain in our financial module how you need to build in buffers to your projections, however, to start it off remember that you’ll likely always spend about 30% more than you expect and/or make 30% less than you think. For safety, always project things against your best interest (i.e., more expense, less income).

If you are on the conservative side and you accept the expert recommendation to start your next round of fundraising 9 months before your money will run out, then you can plan your fundraising activities accordingly. If you are too early stage to even have runway, having these in your financial projections and assumptions will go a long way with investors.