How to lengthen your runway?

What is the runway?

The runway: definition

The notion of runway allows to evaluate the remaining time available to continue the activity of a company before the exhaustion of the cash flow. The end of the runway and the lack of cash flow is one of the most important reasons for startups to fail. 

The runway is the length of time that a startup can survive on its available cash, if revenues and expenses remain constant. Most startups raise funds in order to increase their runway until the company starts generating revenues and can finance itself. 

The average duration of a startup's runway is between 18 and 21 months. We notice that the runway is generally higher between series B and series C (22 months) than between theseed phase and series A (18 months). However, these data remain indicative. The runway can indeed depend on factors such as the product, the growth strategy, the team, etc. 

Why is it important to extend a company's runway? 

The runway thus gives a good vision of the available cash. Increasing it means limiting expenses and reducing the rate at which the company uses its cash. Controlling and increasing the runway allows the company to have a better projection capacity and gives it more leeway in the conduct of its activities. 

With an extended runway, the start-up can raise additional funds, forexample. The fundraising process is indeed very time consuming and can take up to 6 to 9 months. In addition, investors tend to favor partners who have a good command of their runway. According to Paul Graham, startup founders are less likely to raise money when they have only 4 months of runway left.

Extending the runway is therefore of paramount importance and helps avoid running out of cash. More globally, extending the runway of a company improves its ability to adapt and anticipate potential cash flow movements. This can make cash management healthier and less dependent on external capital and better cope with unforeseen events, such as when the startup has to face a major expense or when the fundraising process drags on.

How to calculate the runway?

To calculate the runway, you first need to analyze the company's financial situation and have an overview of all its cash inflows and outflows . Such an analysis then enables assumptions and estimates to be made about future cash flows.

In order to be as precise as possible and to have a good vision of the cash flow, it is advisable to study a fairly long period. Indeed, the longer the period chosen and the more data you have, the more detailed and rigorous your projection will be. However, basing your forecast on a single month is sufficient. 

Determine the cash balance

Once you have chosen the period on which the calculation will be based, you will be able to determine the cash balance at the beginning of this period as well as the current balance. 

• For example, if nine months ago a company had €500,000 in its bank account and had raised €5 million during that period, the starting cash balance would be €5.5 million. 
• If the company had €5 million in the bank at the end of the nine-month period, then the closing cash position is €5 million.

Calculate your net absorption rate?

Once the starting and ending cash balance has been estimated, the net burn rate of the startup should be calculated. This indicator measures the amount of cash "burned", or spent, each month and thus gives a good measure of negative cash flow.

The net burn rate is an indicator that takes into account incoming and outgoing cash flows. In effect, it measures the amount of money spent each year by the company, taking into account the expenses and the potential positive income or cash flow.

The net burn rate is obtained with the following calculation:

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

Using the previous example, we obtain:

net burn rate = (€5,500,000 - €5,000,000) ÷ 9 months

net burn rate = 500 000 € ÷ 9 months

net burn rate = 55 555,55 € per month

Thus, taking into account all the cash inflows and outflows, the company "burns" about 55,555 € per month.

Deduce the final runway 

To calculate the number of 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. We get the following formula: 

Runway = current cash balance ÷ burn rate

In our example, the startup has €5,000,000 at the end of the period and its net burn rate is €55,555

Runway = current cash balance ÷ burn rate.

Runway = 5 000 000 € ÷ 55 555 €.

Runway = 90 months

Thus, the company we have just studied has a runway of about 90 months. 

How to lengthen your runway?

The runway start-up is an accurate indicator of how much time the business has left given its cash flow in and out. If the time is short, with no short-term profit, then you should consider additional financing options to keep your business afloat. 

It is also interesting to optimize cash flow. One way to do this is to reduce costs and expenses. Indeed, operating costs are a factor in determining the runway, so reducing unnecessary expenses should be at the top of your priority list to extend the runway. 

On the other hand, 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. 

Find dilutive financing solutions

In order to extend its runway and find cash before raising funds, the company can resort to dilutive financing solutions. For example, the financial bridge is a financing tool that meets a specific but urgent need for financing for a company. 

It is often an essential step between two fundraising rounds to ensure startups have quick access to capital, while preparations for fundraising can drag on. However, the bridge is based on a discounted valuation of the company, sometimes corresponding to that of the previous financing round, and further dilutes the existing shareholders.

Find non-dilutive sources of funding.

It's possible to extend your runway with Revenue Based Financing and Karmen. This financing solution is 100% non-dilutive, digitalized, fast (in less than 72 hours!) and is not based on a discounted valuation of the financed company, nor does it impose high interest repayments. 

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). 

For start-ups, we are often their first source of growth capital to help them accelerate before raising funds. 

For venture-backed companies, we provide an additional source of non-dilutive, founder-friendly capital to help entrepreneurs achieve their growth objectives, while retaining ownership of their company. 

To be financed by Karmen, you must have annual sales of at least €300,000, and be a French entity. To find out more, don't hesitate to contact our teams!

‍And so,the runway is the indicator that expresses how long a company 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. To lengthen the runway, we can resort to dilutive financing solutions or simply optimize cash flow.

Karmen is the financing solution that lengthens the runway and enables entrepreneurs to ensure the long-term viability of their business until the next round of financing. It's a non-dilutive type of financing (there's no transfer of capital in exchange), favored by startups.