How Much Runway Should a Startup Have?

One of the most common questions that entrepreneurs face is how much runway they should have for their startup. 

It’s a tricky question to answer because it depends on many variables. However, there are rules of thumb for each startup stage that you can take as a guideline. Let’s discover what these are.

What is Startup Runway?

Runway is the measure of how long a startup business can keep operating before it runs out of cash. 

It is calculated by dividing the current cash balance by the burn rate, which is the rate at which the startup spends money. 

A startup runway is important for planning, budgeting, fundraising, and evaluating the viability of the overall business model. In a nutshell: 

  • A longer runway means more time to achieve profitability, growth, and product-market fit. 
  • A shorter runway means more pressure to generate revenue, cut costs, or raise more capital. 

How Much Runway Does a Startup Need?

There is no definitive answer to this question, as different startups have different needs, goals, and risks. However, there are some general guidelines and factors that can help entrepreneurs estimate their runway and plan accordingly.

A rule of thumb is that a pre-seed or seed-stage startup should have at least 6 to 12 months of runway, while a later-stage startup should have at least 18 to 24 months of runway.

What Affects a Startup’s Runway?

Startup Stage

The first factor to consider is the stage of your startup. There are several stages in total:

  • Ideation: The beginning and the idea for the startup. The founder defines the problem they want to solve, the target market, and the value proposition of their solution.
  • Validation: Where the idea is tested with potential customers, partners, and investors. The founder seeks feedback, conducts experiments, and builds a minimum viable product (MVP) to validate assumptions and hypotheses. The founder will also refine their business model and strategy based on the data and insights they gather.

Ideation and validation are considered “pre-seed” stages and are usually the point where investment is yet to be secured. Funding is achieved by using the founder’s savings or grants and the runway should be 6 – 12 months.

  • Traction: The startup begins to generate revenue, acquire customers, and grow its user base. The focus is placed on scaling the product, marketing, and sales efforts, as well as raising funds from external sources. Typically, more team members are hired and the organization’s culture and vision are established.
  • Scaling: The startup achieves product-market fit, meaning that it has a large and loyal customer base willing to pay for its solution. Market share is expanded and the product offering is diversified. Operations, processes, and systems are optimized to increase efficiency and profitability.

Traction and scaling are considered the “seed stages” and by now, investment will have been secured and provided. The runway for the seed stage should also be 6 – 12 months.

  • Maturity: The startup is now an established company that dominates its industry or niche. There is a clear vision and mission for the future of the company, and long-term goals and opportunities are defined and pursued.

Maturity is the coveted “later” stage and it means your business is a success! But that does not mean you can rest on your laurels. A runway is still required and it should be longer than previous runways. In all, a later-stage startup should have 18 – 24 months of runway.

Burn Rate

The second factor to consider is the burn rate of the startup. Burn rate is the amount of money that a startup spends per month to cover its expenses and is calculated by subtracting the revenue from the expenses. 

  • A lower burn rate means that a startup can extend its runway and survive longer before it needs a new injection of cash.
  • A higher burn rate means that a startup needs more funding and has less margin for error. 

The burn rate can be managed and adjusted as time goes on since you have an element of control over the money you spend. If you need to scale back your expenses to extend the burn rate, then you can search for ways to do this.

Overall, you should aim to keep the burn rate below 15% of your total funding.

Fundraising Environment

The third factor to consider is the fundraising environment of the startup. This is where you raise money from investors to support the growth of your startup. 

However, it is not entirely straightforward since the environment and eventual outcome is influenced by various external factors, such as market conditions, investor sentiment, industry trends, and competition. 

  • A favorable fundraising environment means that you can raise money fast and easily and usually for a higher amount. 
  • An unfavorable fundraising environment means that you may face more challenges and delays in raising money and ultimately receive a lower sum. 

The best advice here is that you should anticipate the worst-case scenario and plan for at least six months of additional runway in case you run into fundraising difficulties.

Contingency Plan

The fourth factor to consider is your startup’s contingency plan. This is a backup plan that is activated in case of unforeseen events or circumstances that may affect the present runway or operations. For example, if a recession hits your country.

It may include actions such as cutting back on costs, pivoting the product, changing the business model, or seeking alternative sources of funding. 

A contingency plan can help you mitigate risks and swiftly adapt to changes. Generally speaking, you should aim to have at least one contingency plan for every major assumption or variable in your business.

Conclusion

There is no one-size-fits-all answer to how much runway a startup should have. However, by considering the stage, burn rate, fundraising environment, and contingency plan of the startup, you can make more informed and realistic decisions about your runway and funding needs.

If you need more assistance and advice on your startup, runway, and funding options, talk to a Finvisor advisor today. 

To learn more about what we do, or to request a quote, contact us at hello@finvisor.com or 415-416-6682. We’re here to help you navigate deferred revenue journal entries so you can make the most of your assets!

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