Understanding how long startup capital can sustain operations before the startup needs to secure additional funding is an important metric for investors to understand. While there is a basic calculation for startup runway, determining a startup’s true runway is more nuanced, as market conditions could change, unexpected expenses could come up, or other things could occur. In this blog, learn more about calculating a startup’s true runway and some key considerations when evaluating startup runway.

Calculating a Startup’s True Runway

When most people consider a startup’s runway, they measure the implied number of months that a company can continue operations before depleting its available cash reserves, assuming that its current sales and operating expenses remain unchanged.

The most basic formula is Startup Runway = Current Cash Balance / Monthly Net Burn Rate

However, each individual part of this calculation requires some consideration.

Current Cash Balance

This metric refers to the company’s liquid cash and cash equivalent. While a startup may provide a current bank balance, an investor should consider if there are any restrictions on this cash. Are there debt payments or specifically earmarked funds? Is the cash balance representative of a recent funding round, or does it reflect revenue from company operations?

Net Burn Rate

This metric is the rate at which a company spends money, typically expressed on a monthly basis. It is calculated as the difference between how much money was spent and how much money was generated through sales.

A startup that has $500,000 in cash and spends $50,000 per month has a baseline runway of 10 months. However, investors can go deeper into these numbers to understand the startup’s true runway.

Some Key Considerations

Basic startup runway calculations make assumptions that rely on static numbers. The reality of startups is that things change, sometimes very quickly and unexpectedly. To estimate a startup’s true runway in a dynamic environment, an investor should consider various scenarios to which to compare basic assumptions.

1. Scenario Analysis

Investors may want to consider multiple potential scenarios for startup runway:

• Base Case: Uses the company’s current revenue and expense projections with no assumptions
• Conservative Case: This may assume lower-than-projected revenue growth and considerations of unplanned expenses
• Downside Case: Assumes a significant downturn in revenue, such as the loss of a major customer, failure to hit product milestones, or adverse market conditions that may impact future fundraising

Considering that the startup has a runway of 10 months under current conditions, however that runway decreases to 7 months under a conservative scenario, can provide a range for investors to consider potential scenarios with unexpected expenses.

2. Assess Revenue Quality and Sustainability

For the purposes of calculating startup runway, the forecasting of sales and cash coming in is important. Does the startup have any sort of recurring revenue? Is it all one-off sales? Did the startup temporarily run a large sale or engage in a substantial marketing promotion?

• Recurring Revenue: A startup with monthly recurring revenue (MRR) or annual recurring revenue (ARR) may have steady cash flows, making runway calculations more assumable
• One-Time Sales: Startups that rely on one-time transactions typically have less revenue compared to one with recurring revenue. Their runway can be more volatile, susceptible to sales cycle fluctuations, and can range up or down month to month.

3. Evaluate Expense Projections

Investors should consider the realistic nature of expense projections given by the startup. It may project a decreasing burn rate as anticipated economies of scale kick in. However, decreasing expenses may also correlate to a decrease in revenue growth, nullifying the benefit of decreasing net burn on a startup’s runway. Does the startup’s sales increase when there is significant marketing spend on ads? Does the startup project sales to stay the same once marketing spend is decreased? A true runway estimate should be weighted towards the company’s current cost structure, not optimistic future assumptions.

4. Understand the Fundraising Environment and Timeline

A 10 month runway doesn’t mean that the startup has 10 months to secure new capital. The process of fundraising can be lengthy and resource intensive. A good rule of thumb is for a startup to maintain 6-12 months of runway before their next fundraise. This lead time can give the startup enough time to prepare materials, engage with investors, negotiate terms, and secure capital.

Final Thoughts

Calculating a startup’s true runway involves more than just dividing cash reserves by monthly burn rate. Investors should consider potential customer loss, unexpected market conditions, overly optimistic projections, and unexpected expenses. True runway is not a single number, but a dynamic range that investors should consider when assessing a startup’s financial health.

Are you ready to invest in startups? Sign up for a MicroVentures account to start investing!

Want to learn more about investing in startups? Check out the following MicroVentures blogs to learn more:

• Understanding Pro Rata Rights
• Checklist for VC Due Diligence
• How to Evaluate a Founding Team
• Early-Stage Investing: SAFEs Explained

 

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.