Running a startup will take a large amount of funds. Think of funds as the fuel that makes a business keep running. And just like a vehicle, funds will eventually run out. To be able to keep on going as a startup means to know the startup runway.
As stated in JP Morgan, data from the Bureau of Labor Statistics shows that 20–25% of new information startups fail in their first year, and by the fifth year, that number has risen to almost 50%. That’s why by understanding the startup runway, you can extend your startup and even grow it into the next stage. Let’s immediately get into it!
What Does Startup Runway Mean?
The startup runway means the number of months a business can function with its available cash. It basically refers to how many months a business may stay open before running out of money and need more funding.
The term “available cash” itself describes money that can be used to pay for expenses right now or within a reasonable amount of time. Without enough runway, a business runs a risk of failing before fully understanding the industry.
The runway is calculated by dividing the whole amount of available cash by the total amount of monthly expenses for businesses that are not yet making money. Assume that a business (with no revenue) spends or burns roughly $10,000 per month. If they have $100,000 in the bank, it means that their runway is ten months. The startup would have to establish a cash reserve larger than its expenses over these 10 months in addition to bringing its products to market.
The Ideal Startup Runway
Silicon Valley Bank (SVB) advises businesses on saving enough money to survive 12 to 18 months. However, this number is simply a guideline and not a strict standard.
Furthermore, business owners may have gotten away with a 12- to 18-month strategy in the previous several years according to SVB’s 2022 study of investor trends. Investors nowadays, however, prefer a longer-term perspective, such as a strategy that lasts 24 to 36 months. If you can’t reach milestones in that time frame, they might not want to invest.
Fred Wilson and other seasoned venture capitalists recommend planning roughly 18 months for a startup’s runway between rounds. The purpose of this time frame is to allow you a bit of room to carry out your goals.
Calculating Startup Runway
To calculate the runway, several aspects need to be considered:
- Choose the time period: Monthly is a widely used time period. However, a quarterly or annual term can be used to prevent any odd cash inflows or outflows.
- Estimate the startup’s current cash balance: It includes all cash in bank accounts and any other liquid assets that can be turned into cash in a reasonable amount of time.
- Documenting expenses: Start keeping track of every small expense you spend while operating your startup such as the teams you hire and running costs like office space, internet, food bills, phone bills, and more.
- Estimate revenue: Figure the entire amount of revenue made each month. This covers all revenue received from services, sales, and other sources.
- Calculate burn rate: The term “burn rate” describes how quickly a company can use up its capital reserves in the event of a loss. The calculation involves subtracting the startup’s monthly revenue from its operational expenses.
- Determine the runway: To determine the length of your startup runway, divide the amount of funds available in your bank account by the net cash burn determined above.
Net Burn Rate = Monthly Cash Expenses – Monthly Cash Revenue
Cash Runway = Current Cash Balance / Net Burn Rate
How to Reduce Cash Burn?
There are several ways to reduce cash burn for your startup, which are to:
- Regularly check your financial flow.
- Cut back on expenses.
- Manage your accounts receivable.
- Establish an emergency savings account.
- Seek out cost-friendly loan options.
Gain Funding to Extend Startup Runway
In the end, you need more fuel to run further. That is why gaining funds is important in growing a startup. To achieve that, you will need a killer pitch deck to secure a deal with investors. With Neermana, you can accomplish it! We provide you with a visually compelling impactful pitch deck. Learn more about us through our work and contact us for more details!
