It’s fitting that the image of an airplane runway has become an apt metaphor for startup longevity—too long, you lose momentum. Too short, you won't have enough speed to take off.
Having appropriate runway—the right funding for the right period of time—is essential to a business’s survival. And while too little cash is one of the most pervasive challenges startups face, excess funding can lead to complacent goal setting, ineffectual management and inefficient operations.
Whether you’re a consumer tech startup targeting an IPO or a life sciences company hunkering down for the drug development process, it’s critical to accurately determine runway factors. Although the math behind runway is basic, the reality of running a startup can quickly upend the clearest equation—and unprecedented challenges can arise quickly, as we’ve seen at the beginning of 2020. Careful analysis, self-reflection and the occasional reality check can increase the odds that your business takes flight at the right time.
Mapping Your Runway
It’s a simple idea: The more dollars on hand, the longer the runway, giving your business more time to ramp up and take off.
Airplane with the words 'your business' on it. Airplane is in middle of runway heading right, with 'dollars on hand' to the left and dollar signs gradually increasing on the right.
The right amount of runway varies based on your stage, expenses and funding plans.
“The general rule of thumb is you want to have enough runway to manage your business through a milestone that drives valuation and increases the odds of a successful fundraising,” says Mimi Ghosh, Vice President, Technology & Disruptive Commerce Group, J.P. Morgan.
To get started, you need to know your net burn rate. This is the average monthly expense of running your business—from overhead costs to any living expenses you need to offset—minus any capital that might be saved up or coming in. By dividing available cash by monthly net burn rate, you’ll quickly calculate how many months you can operate in the red without running out of money.
200,000 dollars cash balance on January 1 minus 80,000 dollars cash balance on Decemeber 31 equals 10,000 dollar monthly burn
Experts say most seed-stage startups should plan for a runway of 12-18 months, allowing time for essential projects to reach the finish line plus wiggle room to line up additional funding.
“Think about how much capital you really need in order to accomplish your next milestone,” Ghosh says. “But also have the flexibility on the tail end of that plan in order to focus on your next fundraise—because fundraising really distracts from a management team’s attention.”
That flexibility is key, because you don’t want to go into a fundraising round without any remaining cash on hand. Once you determine your burn rate and runway, you can be more strategic heading into those funding discussions. That should help avoid a situation where you feel like you have to take whatever deal investors are offering.
Practical measures like outsourcing labor, reducing personal expenses or negotiating vendor contracts can help reduce burn rate, but these efforts only buy so much time.
“Raising capital always takes longer than anybody plans for,” notes Francis Chmelir, a consultant who has mentored growth-focused tech startups since 2004. “If you’re raising it from investors, you’ve got to be thinking about the schedule you’re on, but that doesn’t always match up with where a fund or an investor’s schedule fits.”
Those with VC or angel-backed funding (about 6 percent of all startups) wait an average of 18 months before Series A funding comes through, and 20 additional months before Series B.1,2
As those funds come in, stay focused on business goals. “It’s tempting to raise additional capital or have that excess cash in the bank,” says Ghosh. “But you also want to make sure that you’re keeping yourself laser focused on what you need to accomplish with each round.”
The runway metaphor can continue at the Series B stage, where revenue may be ramping up, mitigating higher spending. Along the way, you should monitor your maximum net burn rate to ensure it aligns with about 18 months of runway.
Alex Paley, co-founder of tech startups Halo Kitchens and Dairy Free Games, says many startups can benefit from looking beyond the calendar. Rather than months, he says, it’s better to view your conceptual runway as a series of necessary experiments that available cash on hand can fund.
“Instead of saying, ‘I think I have six months of runway to build my idea,’” Paley suggests, “you can say, ‘I am confident I have enough resources [cash and hours] to test ideas X, Y and Z.’” Just know that when you’re dealing with potential investors, they’ll likely want to know the figure as a time increment, too.
"The general rule of thumb is you want to be able to have enough runway to manage your planned meaningful next step to get to your next round of fundraising."
Mimi Ghosh
Vice President, Technolgy & Disruptive Commerce, J.P. Morgan Commerical Banking
Navigating Turbulence
Many businesses fail for financial reasons: cash depletion, pricing issues, unrealistic sales projections or failure to find investors. But some of the most critical issues that sink startups are nonfinancial factors.
1. Neglecting communication. Effective communication among co-founders and team members is essential to staying on schedule and budget. It’s especially important when, as is often the case, not everyone is at one central location. Communication tools can be a blessing, but remote chats also lead to multitasking and tuning out important conversations and questions. Commit to transparent communication, which is the only way to pivot in response to changing projections, unforeseen challenges and personal issues that are bound to arise.
2. Expecting things to go as planned. Unanticipated expenses is an oxymoron in the startup world, as companies should prepare for just about anything. Unfortunately, many business owners don’t. “Looking to an experienced management team, board of advisors, bankers and individuals that can help you navigate unexpected things that come up is helpful,” Gosh says.
3. Asking for too little. When your business is crunched for cash, excessive frugality is an easy mistake, Chmelir said. When talking to potential investors, he says to “be really clear on how much you need.” When sources ask if you anticipate needing future funding, be honest rather than optimistic. “Often, the amount of work it takes if you’re asking an investor for $150,000 or $200,000 is the same amount of work you would need to get $500,000.”
4. Thinking too long term. Finally, Chmelir also has guided clients through impractical ideas about timing. “A lot of entrepreneurs like to make five-year projections, which shows the nice hockey stick revenue growth opportunity,” he says. “But when you have a limited amount of funds, you really have to think on a monthly basis.” This is especially true in the early days when monthly burn rate is a critical metric.
"But when you have a limited amount of funds, you really have to think on a monthly basis."
- Francis Chmelir, Startup consultant
Get Ready for Takeoff
So how do you ensure you have the proverbial Goldilocks of runways: not too long, not too short, but just right? It comes down to best practices.
The Tactics: Sketch out what you need to accomplish for a successful launch and what tasks you’ll need to finish to get there. Take action to align stakeholders.
The Math: Determine what these experiments will cost and how much time and money you’ll dedicate to each. Allow sufficient padding for the unexpected.
The Gut Check: Set realistic expectations for your seed money, and be transparent about any obstacles. Doing so helps not only you and your business partners, but also anyone who’s funding you (or considering doing so).
