Building a startup is hard work. It’s a balancing act between making the investments necessary to grow the business while also keeping the lights on. Startup runway is a commonly used term in the startup space that refers to how many months a startup can operate before it runs out of cash. This figure is used for budgeting, forecasting, fundraising, and more.
Here, we will review how runway is calculated, how much runway is recommended, and strategies for stretching a startup’s runway.
Calculating startup runway
Startup runway is calculated using monthly expenses. To get the most accurate runway projection, using a longer timeframe (i.e., multiple months) is recommended.
The basic formula we will work with is:
Current Cash Balance / Burn Rate = Runway
For example, imagine that ABC Inc. is trying to determine their runway based on six months of data. At the beginning of this six-month timeframe, the company had $200,000 in cash. Now, at the end of this timeframe, the company has $85,000.
Next, they would need to calculate their net burn rate. Burn rate is another critical metric that tells how much a startup is losing each month in negative cash flow spent on operating expenses. Net burn rate measures how much cash a company loses each month with both income (such as loans, sales, and investor funds) and expenses taken into account.
Net burn rate can be calculated using this formula:
Starting Cash Balance – Ending Cash Balance / Number of Months in the Period
In our example, it would look like this:
$200,000 – $85,000 / 6 months = $19,166.67 monthly burn rate
Now, we can determine how much runway the company has (assuming its income and expenses stay the same) using the first formula.
$85,000 / $19,166.67 = 4.43 months of runway
How much runway is necessary?
Generally speaking, recommendations for startup runway are based on the average time between fundraising rounds. This recommendation can also change depending on the stage a company is at; early-stage companies may be able to get away with having less runway than later-stage companies.
According to CBInsights, the median time between funding rounds for startups is around 12 months for Seed to Series A and 15 months for Series A to Series B. These are just estimates and truly depend on the individual startup’s growth strategy, team, product, etc.
Strategies for extending startup runway
Now that you know how to calculate runway and where to aim, let’s dive into strategies for stretching out a startup’s runway.
This one may seem obvious, but increasing sales (without raising costs) is a surefire way to extend a startup’s runway. This may be done by reexamining pricing strategies, releasing new paid features, upselling current customers, etc.
Reduce non-essential expenses
Reducing burn rate is crucial to increasing startup runway. This means it’s important to take a look at operating costs and determine where fat can be trimmed. This could mean working out of a shared office space, committing to a hiring freeze, or reducing travel.
Create new revenue streams
While it can be tempting to focus solely on the flagship product to start, you know what they say – never put all your eggs in one basket. Creating new revenue streams doesn’t necessarily mean creating a new product, it can also mean creating new add-ons or services that your team is already equipped to provide. Think of it as diversifying your business’ offerings. The more revenue streams available, the less each individual stream must be relied on.
Venture capital funding
Another way to extend a startup’s runway is by raising venture capital from investors. For startups that are between funding rounds, a bridge round can be a good option to help make it to that next milestone.
Keeping your startup moving on the right track so that it can make it to that next big milestone certainly isn’t easy. However, with good planning and the right strategies in place, that next step is possible.
If you’re interested in raising for your startup, you can learn more and apply for an offering on MicroVentures here.
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.