Similar to a pilot, you, a founder and entrepreneur, will fly your startup to success. And as the pilot of your company, you must calculate your company’s runway before you can take off.
A startup runway is defined as how many months your business can operate until you’re out of resources. One of the most common reasons startups fail is because they run out of time and money; they no longer have a runway. It’s like trying to take off a plane without having the proper grounding to do so. It simply won’t work.
That is why knowing your runway is critical to your company’s success. Calculate your runway effectively and constantly based on expenses and growth. Remember to leave about 30% runway as buffer room to resolve any unexpected issues.
How much runway do you need?
For most startups, the answer to this is simple. You need enough runway to reach your next round of fundraising.
But how long will that take?
Sebastian Quintero answered this question using data. He looked at every company on Crunchbase that raised a round of funding and the time it took them to get to the next round.
For all companies that raised a Seed round of funding, for example, he looked at how long it took them to raise a Series A. And so on for Series A companies that raised a Series B, etc.
He found that startups must plan for roughly 18–21 months of runway. To quote his advice,
If it takes you less than 18 months to raise another round then great — keep going — but don’t reduce your probability of success by planning for less than 18–21 months of runway between your financing events.
How do you calculate your runway?
Before you learn how to do so, you must know Net Burn Rate and Gross Burn Rate.
Gross Burn Rate
The total amount of money you are spending each month.
This does not include income. Your gross burn rate is your monthly expenses. If you have no incoming revenue, your gross burn rate and net burn rate are the same.
Net Burn Rate
The bank balance at the beginning of the month minus the balance at the end of the month.
This includes all incomings and outgoing. The net burn rate will give you a clear picture of your monthly capital to plot your runway.
You calculate your runaway by taking your beginning cash balance and dividing it by what we call Net Burn Rate. Simply put, the net burn rate is (gross burn rate — income). Your runway length is the current capital divided by the net burn rate.
Example: You have $300,000 in the bank. Your net burn rate is $20,000. $300,000 divided by $20,000 is 15. Therefore, you have 15 months of runway.
Remember, add in a projected growth cost. We recommend taking 30% off of your runway as a buffer just in case any problems arise. In our example, this leaves only 10.5 months of runway (15 months multiplied by 0.7).
Based on this equation, how long is your runway?
If you need to extend it, the most straightforward way is by decreasing your net burn rate. Outsource a role, a task, or a department. Hire interns to help with simpler developmental roles. Or, negotiate salaries down for employees by using the company’s stocks.
How will you hit your milestones?
Growing your business is all about finding the right balance. Overall, it depends on how much money you can raise without losing control of your business or giving away too much equity.
While fundraising, you need to make progress on the following three overarching topics:
- Recruiting and retaining talent
- Enhancing your product
- Maintaining public relations
If you don’t, you may not meet your financial and traction goals.
Focusing on small, daily tasks instead of pushing to advance your resources will cause your runway to disappear. This will cause your company will crash before it ever gets to take off.
Understanding your runway’s sustainability is vital for success.
Arcanium’s Concluding Comments
As the pilot of your startup, it is up to you and your team to know your runway and take off before it ends.
Plan. Save. Make projections.
As we mentioned before, according to experts, you’re likely to spend about 30% more than you expect, and you’ll make 30% less than you think.
Plan your fundraisers and manage your burn rate accordingly.
Project finances against your best interest, with more expenses and less income. This will act as your safety cushion when you run into any problems.
Startups, buckle up! You’re in for a bumpy ride. It will be worth it, though, when you reach your destination.
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