Put simply, runway is cash on hand divided by monthly burn rate.
With such a simple definition, it’s surprising to read that 29% of failed startups list “Running out of Cash” as one of their primary reasons for going under. And while it’s unwise to associate causation with correlation, a number of these startups might still be around today if they had been more cautious with how they utilized and planned out their runway. Below we have outlined some common and not-so-common runway pitfalls so that you can avoid the same fate.
Misusing the Runway
Your runway isn’t a cushion of time where you can develop your idea behind closed doors. All of your efforts should be directed towards validation, scaling, and ideally, achieving ramen profitability. At the end of your runway you’ll need to either extend with additional capital or achieve profitability. Neither can be achieved if you haven’t achieved milestones for investors or revenues for sustainability.
At Venture First, when we onboard new clients for our CFO Services, most all understand the concepts of runway and burn and have done some rough calculations to map them out. But more often than not, something is left out. Failing to factor in things like variable burn rates, shifting unit economics, and unforeseen expenses can often lead to founders running out of cash too soon or raising too much money.
If you don’t have a finance expert on your team or can’t currently afford to hire an external firm, the Runway Tool from LTSE can help provide some direction on your runway.
Not Factoring in Time for Fundraising
Every moment you spend fundraising is a moment you’re not building your company. Depending on the milestones you’ve hit and your company’s financial health, the fundraising process can take anywhere from 3-9 months. During these months, you might think you can split your time between fundraising and company building, but inevitably one of them will take over your focus. This can be fatal unless you’ve blocked out the necessary months for fundraising and hit necessary milestones in advance.
Not Considering All Extension Options
Continuous equity raises aren’t the only way to extend your runway. Previously we covered venture debt and when it’s an appropriate measure. Founders should also consider revolving credit lines, credit cards, accounts receivable loans, more affordable cities to scale in, outsourcing work, and if need be, doing consulting work on the side.
Poor Unit Economics
It might be tempting to follow in the footsteps of startups like Spotify, Snapchat, or Uber and sell VC-subsidized offerings for years on end only to become profitable once critical mass is obtained, but these companies are the exception and not the norm.
The reality is that if you scale your company based off the premise of VC-subsidized offerings, then when it comes time to flip the switch to profitability you will likely face the end of the road. To achieve profitability you’d have to either raise prices or lower costs. In the case of raising prices, Another VC-subsidized company would immediately undercut you. In the case of lowering costs, another VC-subsidized company would immediately offer better rates to your suppliers and invest more in customer acquisition.
As your company enters its growth stage, venture capital should be reserved for scaling your operation, not subsidizing offerings. If your unit economics aren’t sustainable on their own then you run the risk of building a business that can’t exist at scale.
In all cases, the sooner you can transition your venture into being profitable, the better. Not only will your idea be fully validated as a feasible venture, but you’ll also be free from the ever-ticking countdown of a runway.