What are the advantages for a SaaS to increase its runway?

What is a SaaS? 

SaaS, or Software as a Service, is a service hosted in the cloud. Customer organizations and businesses use this solution via an application or web browser, rather than downloading software. The SaaS solution is easily accessible and is usually billed as a monthly or annual subscription . 

This SaaS software management model allows for automatic updates and new versions of the software. Another advantage is that SaaS models offer lower upfront costs than downloading and installing traditional software, making them more affordable. 

Examples of SaaS 

Among the most common applications available as SaaS are customer relationship management ( CRM) tools, HR management solutions and ERPs (a set of integrated applications or modules for managing the main management processes of a company). 

Among the main providers of SaaS software are Salesforce, Oracle, IBM, Intuit and Microsoft. This is one of the four main categories of Cloud Computing. 

There is also Infrastructure as a Service(IaaS), which avoids companies buying hardware by offering them cloud infrastructures, for data storage for example; companies in this sector are AWS, Google Compute Engine, Cisco Metacloud, DigitalOcean, etc. 

The Platform as a Service(Paas), is a service offering cloud tools to developers to create, deploy and manage their own applications in the web; providers of this solution are Windows Azure, Google App Engine, Amazon Elastic Beanstalk, Heroku, etc. 

Why is it important to monitor the runway of a SaaS? 

The runway of a SaaS is the length of time the startup can survive in the market if revenues and expenses remain constant. A startup with no revenue, for example, spends about €10,000 per month. If the company has €100,000 in the bank, its runway is 10 months.

Runway exhaustion is one of the most likely reasons for startup failure. Therefore, most startups raise funds in order to increase their runway until the company starts generating revenue. 

The runway is in a way the life expectancy of the startup. This is why it is particularly important to monitor the runway of a SaaS. In order to avoid running out of cash, it is indeed necessary to monitor this indicator and anticipate early enough to raise additional funds. The fundraising process can take 6 to 9 months.

How is the runway calculated in a SaaS? 

Calculating the runway for a SaaS is easier in theory than for other companies. Indeed, since most SaaS customers have a monthly or annual subscription, it is easier to predict the cash flow variations over the coming months and years. 

In both cases, you need to have a good knowledge of the startup's revenues and expenses for the chosen period. As a general rule, the longer the time period you choose and the more data you have, the more accurate your projection will be. However, using a single month is sufficient. 

Here is the formula to calculate the runway: 

Runway = current cash balance ÷ burn rate

We will now detail the steps of the calculation.

How to calculate the starting and closing cash flow?

Once the period on which the calculation will be based has been chosen, it is a matter of estimating the cash balance at the beginning of this period. For example, if six months ago a Saas had €300,000 in its bank account and it had raised €2 million during that period, the starting cash balance would be €2.3 million.

Next, determine the current cash balance, at the end of the period being measured. For example, Saas had €1.9 million in the bank at the end of the six-month period, so the closing cash balance is €1.9 million.

How to calculate your net absorption rate?

Once the starting and ending cash balance is estimated, the startup's burn rate must be calculated. The burn rate measures how much money you "burn", or depend on, each month. In other words, the burn rate is the negative cash flow.

Net burn rate: Unlike the gross burn rate, the net burn rate measures the amount of money you lose each month by taking into account expenses and potential positive income or cash flow. 

It is calculated as follows:

net burn rate = (beginning balance - ending balance) ÷ number of months in the period

net burn rate = (2 300 000 € - 1 900 000 €) ÷ 6 months

net burn rate = 400 000 € ÷ 6 months

net burn rate = 66 666,66 € per month

Taking into account all the cash inflows and outflows, the Saas in our example "burns" almost €67,000 per month.

How to deduce the runway of a SaaS? 

It is now possible to calculate how many months the startup can survive if its revenues and expenses remain the same. Simply divide its current cash balance and divide it by its burn rate. 

In our example, the startup has €1,900,000 at the end of the period and its net burn rate is €66,666

Runway = current cash balance ÷ burn rate.

Runway = $1,900,000 ÷ $66,666.

Runway = 28.5 months

So the Saas we just studied has a runway of just under 29 months. For a growing software company, that's a pretty healthy number. The current cash balance could see it through the next round of funding or the next stage of growth. 

What should be the optimal runway for a SaaS?

Before counting on revenues and potential profit, startups often start by iterating and investing in their innovative solutions through a series of fundraising rounds. 

This is especially the case for SaaS, which generally need to reach a certain critical mass before fully addressing the monetization of their service. Thus, most of the recommendations regarding the startup runway actually express the average time between each fundraising stage.

For years, experts have recommended that startups aim for a cash flow period of 12 to 18 months. 

This estimate is now considered too conservative, so startup founders should have a runway of at least 18 to 21 months. 

We note that the runway is generally higher between Series B and Series C (22 months) than between the priming phase and Series A (18 months). However, these data are indicative. The runway can indeed depend on factors such as the product, the growth strategy, the team, etc. 

What are the advantages for a SaaS to increase its runway? 

• Controlling and increasing its runway allows the Saas to have a better projection capacity and gives it more leeway in the conduct of its activities. 
• Investors and partners tend to trust more easily startups that have a good command of their runway. For example, Paul Graham states that after 3 months of runway, startup founders are less likely to raise money.
• Extending the runway allows the startup to deal with unforeseen events, such as when the startup has to face a major expense or when the fundraising process drags on.

How to increase the runway of a SaaS? 

Increase revenues

Increasing revenue without significantly increasing costs is the most obvious way toextend the runway. You can explore upselling or cross-selling strategies with current customers, change pricing, charge for new features or go after an adjacent market. 

Reduce costs

The runway and burn rate are based on operating costs, so reducing unnecessary expenses should beat the top of your priority list to extend the runway. With rent and salaries often being the two largest expenses, consider moving to a co-working space or instituting a hiring freeze, for example. 

Find non-dilutive sources of funding.

Karmen is a non-dilutive funding solution that helps digital businesses access instant growth capital. Instead of waiting for online or subscription revenues to be collected month after month, Karmen unlocks the annual value of those revenues, up front. Karmen's solution allows digital businesses to access instant growth capital, within 48 hours, to fund their growth expenses (customer acquisition, marketing, recruiting, technology and more).

With Revenue Based Financing, SaaS companies benefit from a 100% non-dilutive, digitalized and fast financing solution (in less than 48 hours with Karmen!). It is the most interesting financing alternative to increase your runway. 

The only constraints to be financed by Karmen are the need to have a marketing history of more than 6 months and to make a minimum of 8,000 € of monthly sales on a stable basis. For more information, please contact our teams!

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Thus, the runway is the indicator that expresses how long a Saas 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. It is possible to increase it with Karmen and its non-dilutive, fast and transparent RBF financing solution.