3 ways to extend...
3 ways to extend your startup runway and reduce cash burn.
Startup runway refers to how many months your business can keep operating before it’s out of money. This figure isn’t just a ticking clock intended to keep startup founders awake at night. Startup runway is a crucial tool for budgeting, strategizing, forecasting, and fundraising throughout your company’s lifecycle.
It’s a window into how quickly you spend cash, when you need to raise capital, and whether you need to adjust your business model. You can calculate startup runway whether you’re pre-revenue or already making millions of dollars. Investors — from venture capital firms to angel investors — will want to know how long your runway is.
Below, we’ll show you how to calculate your startup runway and cash burn rate in a few easy steps. You’ll learn how much runway you should have at any given time, plus three ways to increase your runway, control spend, and fortify your startup against economic shifts.
How to calculate startup runway.
You can calculate your startup runway using months’ or years’ worth of company numbers. In either case, you’ll need to know your startup’s income and expenses for the chosen period. Generally speaking, the longer the time period and the more data you have, the more accurate your runway projection will be. However, one month will work.
Here’s the simplified startup runway formula:
Startup runway = current cash balance ÷ burn rate
We’ll use a fictional software startup called Super to walk you through the formula.
1. Find your starting cash balance.
First, write down your cash balance at the start of the time frame you’ve selected. For example, six months ago, Super had $300,000 in its bank account. The company also raised $2 million in investor funds during that time.
Example starting cash balance: $2.3 million
2. Find your ending cash balance.
Next, determine your current cash balance, or your cash balance at the end of the period you’re measuring. For example, Super had $1.9 million in the bank at the end of the six-month time frame.
Example ending cash balance: $1.9 million
3. Find your net burn rate.
Once you have your starting and ending cash balance, you’ll calculate your startup’s burn rate, another crucial metric. Burn rate measures how much money you’re “burning,” or losing, each month. In other words, burn rate tells you your negative cash flow. There are two main methods of calculating burn rate:
- Net burn rate: Net burn rate measures how much cash you lose each month when you consider both income and expenses.
- Gross burn rate: Gross burn rate estimates how much cash you spend each month, but doesn’t take income or positive cash flow into account.
Net burn rate is the preferred metric for most startups because it accounts for common cash inflows like investor funds, sales, loans, and more. If you’re using several years of data, remember to convert it to months to properly calculate burn rate and startup runway. Here’s an example using Super’s figures so far:
Net burn rate = (starting cash balance - ending cash balance) ÷ number of months
Net burn rate = ($2,300,000 - $1,900,000) ÷ 6 months
Net burn rate = $400,000 ÷ 6 months
Net burn rate = $66,666.66 monthly burn
Taking all cash inflows and outflows into account, Super is losing nearly $67,000 each month.
4. Calculate your startup runway.
Now, you’re ready to calculate the number of months your business can survive if your income and expenses remain the same. Simply take your current cash balance and divide it by your average burn rate.
Super currently has $1.9 million in the bank, so let’s determine how long it can operate without a capital influx:
Startup runway = current cash balance ÷ burn rate
Startup runway = $1,900,000 ÷ $66,666
Startup runway = 28.5 months
Super has a startup runway of just under 29 months. For a growing software company, this is a fairly healthy figure. The current cash balance could see it through to the next fundraising round or growth milestone. In our example, Super falls right in between the average recommended runway length and the highest recommended runway length.
How much startup runway should you have?
In the startup world, most companies are banking on successfully progressing through the fundraising rounds rather than relying on revenue and financing alone. That means most startup runway recommendations are based on the average time between fundraising stages, rather than an across-the-board figure.
For years, experts recommended that startups should aim for a cash runway of 12-18 months. But a recent analysis of venture capital funding data shows that this is on the low side.
According to the data analysis, startup founders should have at least 18-21 months of runway. On average, the longest time lapse was 22 months, the time between most Series B and Series C funding rounds. By contrast, early-stage startups, between seed stage and Series A, might need just 18 months of runway.
The highest recommendation was roughly 35 months for founders who want to err on the side of caution. This allows time for the two main fundraising stages: hitting organizational goals and putting funds to work, and meeting with investors to raise more money.
It’s important to note that these are ballpark figures. Whether 18-21 months is too much or too little runway for your startup depends on factors like your product, growth strategy, team, and more. What matters most is that you have sufficient funds to stay afloat until you start earning revenue or receive a cash influx from another source.
The startup runway red zone.
In one survey, 55% of startup founders reported fewer than six months of runway left. While that may sound dire, well-known venture capitalists and professional investors like Paul Graham and Peter Sandberg consistently say that the runway “red zone” actually begins at three months. At this stage, startup founders are in a precarious position where firms are much less likely to invest in their company.
The COVID-19 economic fallout pushed many startups across the globe into the red zone. In another survey, over 40% of founders reported they had three months or less of runway left. That said, there are plenty of simple strategies startups can use to carve out additional time and resources.
3 strategies to extend your startup runway and control cash burn.
Use these simple tips to increase cash flow, reduce spending, and build your cash reserves over time.
1. Experiment with ways to increase sales.
There are many creative ways to drive more sales without significantly raising costs. You can upsell and cross-sell to current customers, try different pricing strategies, charge for new features, or go after an adjacent market.
Look for strategies that maximize your return on investment (ROI), such as lucrative corporate partnerships or a more streamlined accounts receivable process.
2. Examine costs, and cut nonessential expenses.
Startup runway and burn rate center around operating costs, so cutting unnecessary expenditures should top your priority list. Rent and payroll are two of the largest startup budget items. Consider switching to a co-working space or instituting a hiring freeze.
If your employees spend on behalf of your business, create a specific corporate card policy. Be sure to use real-time expense tracking software, accounting software, or both to monitor spending.
3. Consider corporate credit cards and other non-dilutive funding sources.
Although distributing equity is a powerful tool to raise financial support, you don’t want to chip away at your ownership in each stage. Look for financing solutions that are non-dilutive. They can provide a crucial lifeline or extend your spending power at critical moments.
For example, the Brex business credit card specifically offers startups higher limits without a risky personal guarantee or lengthy, outdated approval process.
Time to take off.
Having a clear understanding of your startup runway and burn rate helps you develop a sustainable roadmap for your company. Aim for at least 18-21 months of runway, but keep in mind that the total amount of cash you need will vary by industry, fundraising stage, and economic conditions.
Companies in hyper-growth industries, like tech startups, will burn through funds faster than a startup in car rentals. If you crunched the numbers and don't have enough runway to make it to your next growth stage, start applying the strategies above as soon as possible. A business consulting firm can also provide tailored guidance based on your startup model and market.
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