Your pilot guide on extending your startup runway

We all love a good game of ping pong. Imagine your startup’s runway as a thrilling game of ping pong. You might have a blast in the breakroom, rallying back and forth and celebrating your win. But when it comes to your financial runway, it’s not about flashy moves or winning points; it’s about ensuring you have enough momentum to keep the game going until you reach your goals.

But how do you keep the cash intact and ensure your startup stays afloat? Don’t worry; I’ve put together this guide to help you avoid getting caught off guard with your pants down when the financial music stops.

What is a startup runway?

The startup runway, or cash runway, is the time your company has until it runs out of money. This time period depends on how fast you burn through the cash, called your cash burn rate.

While your runway tells you how soon you’ll run out of money, your cash burn rate keeps you posted on how quickly you’re spending that money. To keep it simple, keep your cash runway padded and your cash burn under control.

Some founders think of the runway for startups as a countdown clock ticking away, telling you when you might need to refuel your startup or risk crashing. But your runway indicates more than that. It helps you budget, strategize and forecast to ensure your business stays soaring high.

Why should you forecast cash runway?

Keeping a close eye on your cash runway helps you monitor whether you’re depleting your capital faster or slower than planned so you can adjust your course while there’s still time. This proactive approach increases your chances of achieving your next milestone, whether it’s securing additional funding or reaching profitability.

For early-stage startups, profit often feels like a distant goal. Take SaaS companies, for example. They need significant upfront investment to build a team, launch a new SaaS product and attract customers. While they expect to see returns on this investment eventually, it can take years for the cash to start flowing back in.

During this waiting game, startups rely heavily on investor funding to keep their engines running. The catch is not to burn through that cash too quickly, risking a premature end to your runway.

That’s why understanding, calculating and managing cash runway is key for the survival and success of your startup.

💰 Explore how startups can secure early-stage funding.

How to calculate the runway for a startup

Understanding how to calculate your runway gives you a window into your financial health. Get started by:

1. Calculating your burn rate

Burn rate is the rate at which a company spends its available capital, typically measured monthly, to cover operating expenses and other costs.

You can choose between gross and net burn rates depending on your preference and the insights you seek. Let’s see when and how to consider each:

Gross burn rate

The gross burn rate represents the total cash your company spends each month. Sum up all monthly expenses, including salaries, rent, utilities, marketing costs, software subscriptions and any other recurring operational expenses. This amount indicates your company’s total cash outflow.

Let’s say your startup’s monthly expenses include:

• Salaries: $10,000
• Rent: $2,000
• Utilities: $500
• Marketing: $3,000
• Software subscriptions: $1,500

Total monthly expenses: $17,000

💡 Use gross burn rate to understand the raw rate at which your startup is spending cash each month. It provides a straightforward measure of your startup’s cash outflow without considering revenue.

Net burn rate

The net burn rate gives you the difference between cash out and cash in — the rate at which you’re losing money. To calculate the net burn rate, follow these steps:

1. Add up all your startup’s monthly expenses like you did for the gross burn rate to find the total expenses.
2. Calculate the total revenue or income your startup generates each month. This amount includes any sales, subscriptions or other sources of income.
3. Subtract the total revenue from the total expenses to find the net burn rate.

If the net burn rate is negative, your startup is bringing in more money than it’s spending, indicating a “surplus.” If it’s positive, your startup is spending more than it’s making, indicating a “deficit.”

For example, let’s say your startup has total monthly expenses of $20,000 and generates $15,000 in revenue:

Net burn rate: $20,000 (expenses) – $15,000 (revenue) = $5,000

In this case, your startup’s net burn rate is $5,000 per month, meaning your expenses exceed your revenue by $5,000.

💡 Consider the net burn rate if you want a 360-degree understanding of your startup’s financial performance and its ability to sustain operations with existing revenue streams.

Costs and revenue streams

When calculating your burn rate, you’ll have to consider both current and future expenses.

You should also include both current and forecasted revenue in your runway calculations for a more comprehensive view of your startup’s financial position and prospects.

2. Calculating your cash runway

Once you’ve decided which burn rate to use, the next step is to determine your startup’s beginning cash balance, which is the amount of cash and cash equivalents your startup has at the start of the period you’re analyzing. This amount includes any funds in your startup’s bank accounts, petty cash, short-term investments or liquid assets that you can use to cover expenses readily.

To know your startup’s cash runway, divide the beginning cash balance by the burn rate.

This calculation gives you the number of months your startup can continue operating before running out of cash, assuming expenses and revenue remain constant. Knowing this number helps you invest and budget wisely.

Let’s say your startup has a beginning cash balance of $100,000 and a net burn rate of $5,000 per month.

Using gross burn rate:

Logic: Beginning cash balance / Monthly net burn rate

Runway: $100,000 / $5,000 = 20 months

In this example, the startup can sustain its operations for 20 months without additional funding.

How much runway should a startup have?

While there’s no one-size-fits-all answer, venture capitalists might suggest that startups should raise funds for a 2-3-year runway. Why? A startup runway shorter than that increases the pressure to achieve critical milestones quickly, potentially leading to rushed decisions and limited strategic planning.

To help visualize runway health, consider the green, yellow and red zone systems:

• Green zone (48+ months of runway): Startups in this zone enjoy a comfortable cushion of financial resources, with ample time to execute their business strategy, iterate on their product and adapt to market dynamics without the pressure of cash constraints.
• Yellow zone (24 months of runway): While still relatively healthy, startups in the yellow zone should be mindful of the cash available and proactively manage finances to extend their runway.
• Red zone (12 months of runway or less): Startups in this zone are at financial risk and should take immediate action to address cash flow challenges, whether through cutting costs, generating more revenue or raising funds.

Six ways to extend your startup’s runway

Insight Partners finds that investors are drawn to startups that show efficient growth — aiming for breakeven or profitability. Taking strategic actions to increase growth efficiency not only positions your startup favorably in the eyes of investors but also helps you keep going strong for a long time (giving you more runway to succeed).

Let’s break down the six ways to extend your startup runway.

1. Cut down expenses

A crucial aspect of managing your startup runway revolves around controlling operating costs (reducing the burn rate). Based on Deloitte’s analysis, payroll accounts for 50-60% of the total company spending for a typical Fortune 500 company. Consider alternatives like implementing a temporary hiring freeze to reduce payroll costs.

Follow these specific strategies for cutting costs across various fronts:

• Negotiate discounts with vendors and suppliers and explore bulk purchasing options to reduce procurement costs.
• Designate someone in your startup to oversee purchases and approve every expenditure exceeding $1,000.
• Establish guidelines dictating that all purchases, regardless of size, must align with the business’s growth goals.
• Focus on low-cost or organic marketing channels (e.g., social media, enterprise SEO and email campaigns) to reach your target audience effectively.
• Optimize your budget by reallocating funds to initiatives with higher marketing ROI potential and scaling back on less effective strategies.

2. Focus on customer success

McKinsey’s research shows that delighting customers helps organizations earn greater value from their current customer base. Satisfied customers are highly likely to make repeat purchases and upgrade to higher-value products or services, increasing your business traction.

But how do you make your customers happy? Actively listen to their feedback, gather insights into their pain points and incorporate this information into product development and strategic decision-making. By aligning your product roadmap with customer needs and preferences, you can build more relevant solutions that drive customer satisfaction and retention.

3. Increase sales

Yes, I know increasing sales is the OBVIOUS solution to keep your business running. I won’t waste time convincing you of that! So, let’s skip the preamble and dive straight into the strategies to drive sales revenue.

• Explore new products or services: Identify gaps in the market or unmet customer needs to develop new offerings that address them. This approach could involve expanding your product line or introducing complementary services that enhance your value proposition.
• Bundle products: Partner with non-competing businesses to create innovative product bundles that address multifaceted customer needs and differentiate your brand in the market.
• Identify new target markets: Conduct market research to identify new target markets or demographics with unmet needs or untapped potential. Your marketing and sales strategies should resonate with these audiences.
• Implement a CRM tool: According to 78% of sales professionals, their customer relationship management (CRM) tool effectively improves sales and marketing alignment. Apart from centralizing customer data, leverage advanced CRM functionalities, such as predictive lead scoring and conversational AI, to automate routine tasks and empower sales reps to focus on high-value activities.
• Train the sales team: Invest in ongoing training and development for your sales teams to make them well-versed in effective sales techniques such as question based selling. Implement peer-to-peer coaching programs and gamified learning experiences to enhance skill development and product knowledge.

💡 Discover how to scale your sales team.

4. Raise more funding

According to Skynova, 47% of startups go out of business because they fail to secure funding. Let’s have a look at the two-pronged approach to successfully secure funding.

• Engage with existing investors: Strengthen relationships with current investors by providing transparent updates on your company’s progress and financial situation. Discuss potential follow-on investments based on achieved milestones, demonstrating your commitment to value creation.
• Explore new investor relationships: Diversify your funding sources by identifying potential investors interested in your industry or market. Use networking events and online platforms to expand your reach for additional funding opportunities.

Managing your current funds well opens doors to more investment opportunities. On the other hand, mishandling it can tarnish your reputation and deter investors, resulting in mass layoffs and unnecessary turmoil for employees.

📚 Keep learning:

• How to negotiate startup term sheets with investors

• How to navigate the early stage of investment rounds

5. Leverage debt

While private and growth equity are powerful tools to raise financial support, you don’t want to chip away at your ownership in each funding stage. Look for financing solutions that are non-dilutive.

If you’re exploring loans and lines of credit:

• Research and compare terms: Look for lenders that specialize in startup financing and offer terms that align with your financial strategy and objectives.
• Evaluate interest rates and repayment terms: Consider factors such as fixed vs variable interest rates, repayment schedules and any collateral requirements to make an informed decision.

Convertible notes offer a unique form of debt that can be later converted into equity, typically during a future funding round or milestone event. Ensure the criteria determining when debt can be converted into equity incentivizes investors at favorable terms.

6. Use business credit cards

You can use business credit cards for immediate access to capital without tapping into existing cash reserves or taking on additional debt.

Select business credit cards with rewards programs that align with your startup’s spending patterns and goals. For example, use cashback rewards to offset operational expenses and travel rewards to fund business trips, conferences or networking events that can drive growth and opportunities.

Establish clear spending policies and guidelines for employees who use business credit cards. Define allowable expenses, spending limits and approval processes to ensure responsible and efficient use of company funds.

Here are great resources to find the right credit card for your business needs:

• The Points Guy
• CreditcardGenius

NerdWallet

Startup mistakes to avoid when managing your runway

Many startups encounter common pitfalls that can shorten their runway and jeopardize their financial stability. Watch out for these six startup mistakes.

1. Raising too little

Setting conservative fundraising goals may leave your startup with insufficient funds to weather unforeseen challenges or capitalize on growth opportunities. Conduct a thorough financial analysis, account for potential risks and aim to raise enough capital to provide a comfortable runway that allows for adaptability and growth.

2. Raising too much

While having ample funds may seem like a good idea in the heat of the moment, raising more capital than necessary can lead to mismanagement and inefficiency. Additionally, this excess amount may strain relationships with investors and create unrealistic expectations for growth and performance. To determine the optimal funding amount, forecast how much money you need for people, technology and going to market.

3. Reacting too slowly

Waiting until your cash runway is almost depleted before attempting to raise funds can spell disaster for your startup. Fundraising takes time, and delays in securing investment could leave you without the necessary capital to continue operations. Monitor your runway regularly and initiate fundraising efforts with ample time to secure funding.

4. Reacting too fast

On the flip side, reacting too hastily by cutting costs prematurely can hinder your startup’s growth potential. Firing employees or scaling back operations too quickly may sacrifice long-term growth opportunities, hinder innovation and cause mass morale drops followed by more turnover. Take a measured approach to cost-cutting, considering the impact on your company’s trajectory and sustainability.

5. Overhiring employees

Hiring more than your startup needs can quickly deplete your runway. Not only does it increase payroll expenses, but it also adds overhead costs associated with training, benefits, office space and equipment. Be strategic in your hiring decisions, focusing on essential roles that directly contribute to your company’s growth and success.

6. Lacking contingency plans

Failing to plan for unforeseen circumstances can make your startup vulnerable. You need contingency plans for different scenarios like:

• Financial shortfall: This plan addresses situations like a sudden decrease in revenue or unexpected expenses. It should outline cost-cutting measures, potential sources of emergency funding (e.g., lines of credit) and strategies to extend your funding runway.
• Fundraising delays: This plan tackles situations where a fundraising round takes longer than expected. It should include steps to conserve cash, alternative funding options (e.g., grants, pitch competitions) and potential adjustments to the burn rate.

Project delays: This plan deals with unexpected delays in critical projects that could impact revenue or product launch. It should involve identifying critical milestones, backup plans for overcoming roadblocks and communication strategies to keep stakeholders informed.

Make your startup cash go further

Productive Shop helps technology startups make the most of their investment capital.

With our seasoned team, you don’t need to worry about internal over-hiring and growing a full-fledged marketing team. We take care of the technical stuff (whether it’s web design and development, search optimization or content writing), so you can focus on what you do best — growing your business and disrupting the industry.

Reach out and let’s discuss how to extend your startup’s runway by turning your marketing investments into sales revenues.