Like many founders, you probably have an excellent grasp of many of your startup’s most important considerations. Understanding market demand, visualizing product roadmaps, developing growth plans, and finding your team may well be the areas where you, like many founders, excel.

What doesn’t come so easily to most is the myriad of financial projections, models, budgets, and calculations involved in building a growth-stage startup.  Maybe the one question, in particular, that can haunt the minds of most first-time founders is “How much runway should my startup have?

A quick Google search will tell you that the most common answer seems to be between 12 and 18 months, but is this trustworthy and reliable enough to stake your company’s future on? And what’s behind that number?  Should you understand a little more about this crucial survival metric?

In this article, we’ll discuss runways in, detail, and why startup founders should understand how runway impacts business operations. We’ll investigate the data that will help you know just how much runway you require.

What is a runway?

Let’s not overcomplicate, ever!  A runway is the number of months your company has until it runs out of cash.  It’s your oxygen tank, and when it’s empty, that’s it – everything stops..

It’s a very common and important metric, particularly for early-stage companies that don’t have well-established, predictable, and reliable revenue streams.

Whether it’s your bootstrapped funding or from an investor, if you only have a single source of cash, cash runway becomes a crucial calculation.  It’s even more vital if you’re pre-rev as you have no income revenue.  If you’re seeking a grant, the funder will want to know about your runway.  If you’re employing people, not making the payroll is not an option, so all in all, it’s a must-understand data point for every founder.

So, how exactly do you calculate your runway?

Calculating Cash Runway

Your runway is pretty much determined by your burn rate. This is the cash you’re spending every month.

To determine how much runway your company has, you’ll need to know the following figures:

• The amount of cash you currently have on hand
• Your total monthly expenses
• Your current monthly revenue
• Your burn rate is monthly expenses minus monthly income.

If your revenue is recurring and stable, this may make the burn rate easier to predict.  If it’s spikey and less predictable, you need to be conservative and not overstate your revenue, thus reducing your burn rate.

To determine your runway, divide your total cash by your cash burn rate:

Cash runway = Cash on hand/cash burn rate

Say we have $150,000 in cash on hand. With a burn rate of $10,000, the calculation looks like this:

$150,000 / $10,000 = 15

Meaning our cash runway is 15 months.

That’s pretty straightforward, right?

So why should I be concerned?

If you’re an established company with a strong revenue model, you’re probably less likely to be concerned with runway calculations than startup counterparts.  That’s because companies with sufficient revenue and are turning a profit each month can be more confident that they’ve got enough cash coming in each month to cover their expenses.

If you’re a startup feeling your way, things are probably quite different for you, and every penny matters.  Often, early-stage companies aren’t making revenue yet and  rely entirely on funding and bootstrapping as best they can.

For example, if you’ve just raised a pre-seed funding round, revenue may not be the most important thing on your mind, and you’re more focused on product development, customer insights, honing your MVP, etc.  And that all costs money, day on day, month on month.

This means you’ll be spending more money each month than you’re making.  Your cash burn rate is high because you have no revenue offsetting it.

This is where understanding your startup runway calculations becomes crucial. If you’re not carefully watching your cash reserves and the rate at which you’re consuming cash, you could quickly find yourself with no money leading to an inevitability that you have to close your business as it stands.

In fact, CB Insights reports that running out of cash is the second most common cause of startup failure, second only to a failure to build something that the market wants.

Cash matters, so you need to understand and get right so you’re not constantly worrying about it and can focus on your product and customers.

So how much cash do I need?

Broadly speaking, most advisors  likely suggest that a typical startup needs between 12 and 18 months of runway.  Now that may be a  long time if you’re trying to self-fund, maybe with friends and family. Similarly, if you aim for  hiring people and pay yourself too, that needs to be borne in mind to manage your burn rate.

A study by Invariant studios suggests that the upper end of 18 months rising to 20, with a long tail of up to 36 months, is what happens.

So what does this tell us?

You’d be wise to raise enough to survive for at least 20 if not 23-24 months; that’s two years.  If you want to play it real safe, prepare yourself with up to 36 months of cash runway available to prepare yourself for those unexpected startup costs that inevitably arise, pivots you’ll make, and people you may need to hire.

With a number that’s this important, however, we suggest calculating how much runway your startup needs to be based on your unique circumstances and objectives – you need to nail this one!

Focus: How much runway does my startup need?

You need to work through it by making the simple calculations we’ve spoken about. Having done some background reading, does that apply to my startup and me?

Is that a reflection of reality for me?  Can I buy into those numbers?  We’d wager you probably can’t.  There’ll be things that don’t quite fit, times that are maybe a little on the edge of comfort, and it would be foolish to try and predict that accurately.

So what frame do we use to look at your startup to get an answer you are comfortable with and your startup can operate under.

Using milestones is a better way of tailoring your runway to what you are doing, how you are doing it, why, when, and to what end.  You’ll most likely have milestones in place with performance metrics around them, so they should fit nicely here.

Sometimes, milestones already include funding as an integral component -, they are a key enabler to your delivery.  So your runway becomes important to calculate because you need to know that the cash you have or are raising will be sufficient to deliver the milestone. The milestone and the cash go hand in hand.

Maybe you’re thinking about a Seed Round followed by a Series A funding round, so focusing on what you need to achieve with the proceeds of the Seed is critical to working out your cash runway, deliverables, and setting the stage (even though it’ll change) for your Series. You have to plan for survival between Seed and Series A.

So what does a typical Series A look like because that’s what you need to have achieved by the time you seek investors and what you need to fund with your Seed – they’re very interdependent!  Your Seed needs to fund:

• Establishing a proven revenue model
• At least $500k (maybe up to $4m) in annual revenue
• Proof of Product Market Fit
• Your core team

Let’s assume you’ve made a positive start in your revenue generation and are at $120K, have some happy customers, using your first full product.  The team is coming together, and you’d like to hire some more folks in the near future to support the growth.

Your product roadmap has been fleshed out for the next year targeting revenue growth.

All sounds good.  So, how long is all of this going to take? Is it a 12 month process? 18 months? 24? What does the roadmap say?  What does the customer acquisition growth profile say? What does the revenue model say?  What else is informing this – e.g. churn?

Your product roadmap and revenue development plan should inform this so that you need to have and be bought into two important data points from your financial model and company plan.

Let’s say you’ve agreed as a team that it’s going to take 18 months to execute your crucial product changes, make your key hires, and grow revenue to $500k.

Let’s apply the simple runway calculation: what cash do we have divided by what we spend every month.  Let’s start with our burn rate – what are we spending each month?

We know our annual revenue is $120,000,  equating to $10,000 monthly. Currently, we’re spending $30,000 a month, which makes our cash burn rate $20,000.

Taking 18 months to reach a point where a Series A is viable – i.e., the deliverables and commitments made in the Seed have been delivered, we need $360,000. This is the minimum amount of funding we need to raise during the Seed Round to have a viable runway of 18 months.

But …. here’s where art and science may be merged!  The likelihood is that your revenues won’t stay the same.

For example, you may not have enough data yet to understand a seasonality profile.  You may have lots of repeat customers, reducing your cost of acquisition.  You may need to hire a specialist that you didn’t foresee.

You may find, as so many startups do, you go backward before going forwards.  Being able to scenario plan in your financial model and see simple, clear information from your planning sessions is super important. It would help if you didn’t have to hunt for the info.

And in that scenario planning by finding what’s most sensitive in your business can provide you with probably just a few data points that will most affect your cash runway.  Knowing what these are, and their impact is vital to ensure you protect your startup from running out of cash.

Conclusion

Cash runway is a crucial startup metric to track, particularly if you’re pre-rev or your revenue is unpredictable.

The basic premise is a simple one.  It requires understanding your cash on hand, monthly expenses, and any revenue you’re currently generating. But you need to apply the nuances of your business to make it as valuable as it can be because you need to get this one right.

And even when you get it wrong, which many of us have, you need to be able to course correct very quickly.

You must be tracking cash runway on a regular basis, evaluating revenue and actual expense figures as they develop, so you have an up-to-date understanding of your company’s cash situation at every moment.

Bringing forecast and actuals together in a straightforward, founder-friendly, investor-ready model is where Numberly can help. Keeping the task simple and clear, in your language, and reflecting on your business goals, cash runaway can be a thing that won’t keep you awake at night.

If you need some help with financial modeling or runway calculations,  schedule your no-obligation free consultancy session and let our experts guide you on the way forward.