Not every startup can finance itself from its own revenues. Controlling cash flow and the concept of the startup runway are therefore of paramount importance if you are to continue to develop your business and ensure its longevity. What is the runway and why is it so important? What is the burn rate? Why would you need to extend your runway, and how would you go about it? Read on for answers to all your questions.
What is a startup runway?
The runway: definition
A startup’s runway is the remaining time available to continue a company’s business before its cash reserves are exhausted.The end of the runway, i.e. a lack of cash, is one of the main reasons startups fail.
A startup’s true life expectancy, the runway,is the length of time a startup can survive on its available cash, if revenues and expenses remain constant. Most startups raise funds with the aim of increasing their runway until the company starts generating revenues and can finance itself.
The average length of a startup’s runway is between18 and 21 months. The runway is generally longer between Series B and Series C (22 months) than between the seed phase and Series A (18months). However, these are guidelines only. The runway may in fact depend on factors such as the product, growth strategy, team, etc.
Why extend a company’s startup runway?
The runway provides a good overview of available cash. Increasing it means limiting expenditure and reducing the rate at which the company uses its cash. Controlling and increasing the runway gives the company greater capacity for forecasting, and more room to maneuver in the conduct of its business.
With a longer runway, the startup can raise additional funds.The fundraising process is extremely time-consuming, taking up to 6 to 9months. What’s more, investors tend to prefer partners who have a good grasp of their runway. According to Paul Graham, startup founders are less likely to raise money when they only have 4 months of runway left.
Extending the runway is therefore of the utmost importance to avoid running out of cash. More generally, extending a company’s runway improves its ability to adapt and anticipate potential cash flow movements. This makes cash management healthier and less dependent on external capital and enables the company to cope better with unforeseen events, such as when the startup is faced with a major expense or when the fundraising process drags on.
How to calculate the runway?
To calculate your startup’s runway, we first need to analyze the company’s financial situation and gain an overview of all its cash inflows and outflows. This enables us to estimate future cash flows.
To be as precise as possible, and to have as clear a handle on cash flow movements as possible, it’s best to study a fairly long period. Indeed, the longer the chosen period and the more data you have, the more detailed and accurate your projection will be. However, a single month is sufficient.
Determining the cash balance
Once you’ve chosen the period on which the calculation will be based, you can determine the cash balance at the beginning of that period, as well as the current balance.
- for example, if nine months ago a company had €500,000 in its bank account and had raised €5 million during that period, the starting cash balance would be €5.5 million.
- if the company had €5 million in the bank at the end of the nine-month period, the closing cash position would be €5 million.
Calculate your net absorption rate?
Once the startup and closing cash balances have been estimated, it’s time to calculate the startup’s net burn rate. This indicator measures the amount of cash “burned”, or spent, each month, and is therefore a good measure of negative cash flow.
The net burn rate indicates incoming and outgoing cash flows. In effect, it measures the amount of money spent each year by the company, taking into account expenses and income or potential positive cash flows.
The net burn rate is calculated as follows:
Burn rate net = (opening balance - closing balance) ÷ number of months in the period
Using the previous example, we obtain:
net burn rate = (€5,500,000 - €5,000,000) ÷ 9 months
net burn rate = €500,000 ÷ 9 months
burn rate net = €55,555.55 per month
So, given all cash inflows and outflows, the company “burns”around €55,555 a month.
Derive the final runway
To calculate the number of months a startup can survive if its revenues and expenses remain the same, simply divide its current cash balance by its burn rate.
In our example, the startup has €5,000,000 at the end of the period and its net burn rate is €55,555.
Runway = current cash balance ÷ burn rate.
Runway = €5,000,000 ÷ €55,555.
Runway = 90 months
The company we have just studied has a runway of around 90 months.
How to extend your startup’s runway?
The startup runway is a precise indicator of how much time the company has left given its cash inflows and outflows. If there is little time left and no short-term profit in sight, then you should consider additional financing options to keep your business afloat.
It’s also worth optimizing cash flow. One way of doing this is to reduce costs and expenses. Indeed, operating costs play a key role in determining the runway, so reducing unnecessary expenditure must be at the top of your priority list to extend the runway.
That said, increasing revenues without significantly increasing costs is the most obvious way to extend the runway. You can explore upselling or cross-selling to existing customers, modifying your pricing, charging for new features, or entering an adjacent market.
Dilutive funding solutions
In order to extend its runway and raise cash before raising funds, a company can resort to dilutive financing solutions. For example, financial bridging is a financing tool that meets a company’s one-off but urgent financing needs.
In many cases, this is an essential step between two rounds of financing, to ensure that startups have rapid access to capital when preparations for fundraising take a long time. However, bridging is based on a discounted valuation of the company, sometimes corresponding to that of the previous financing round, and further dilutes existing shareholders.
Non-dilutive funding solutions
It’s possible to extend your startup runway with revenue-based financing and Karmen Runway. This financing solution is 100%non-dilutive, digitalized, fast (in less than 72 hours!) and is not based on a discounted valuation of the financed company, nor does it impose high interest repayments.
Karmen Runway is the financing solution to extend your runway, so you can calmly steer your business through to the next round of financing. Eligibility simply entails a review of the company’s various reporting tools for a real-time view of its financial health.
To be financed by Karmen Runway, you must have annual revenue of at least €300,000, and be a French company that has raised at least one Series A. To find out more, don’t hesitate to contact our teams!
Thus, the startup runway expresses how long a company has before it runs out of cash and has to raise funds. It is important to control and extend the runway as much as possible. To extend your runway, you can turn to dilutive financing solutions or simply optimize cash flow.
Karmen Runway is the funding solution that extends your runway, enabling SaaS founders to ensure the long-term future of their business until the next round of financing. It’s a type of non-dilutive financing (there’s no transfer of capital in exchange), making it a favorite among startups.
Request a free demo of our automated monitoring and reporting solution for your startup runway.
