How to increase your runway with RBF?

What is the Runway?

In the entrepreneurial ecosystem, the runway is the time for which your startup (still loss-making) has available cash without resorting to new financing.

This is your life expectancy or headroom with no new money coming in. In other words, if your startup's revenues and expenses remain as they are (i.e. at a loss), this is the period after which your company will not be able to survive in the market. 

How is the runway calculated? 

The runway is the ratio of your total cash reserve to your burn rate. 

Good to know

The burn what? The burn rate. The burn rate is the rate at which your cash is consumed. It's the rate at which your company uses up its cash reserves, in other words, the rate at which you spend your money. It is therefore a measure of negative net cash flow. It is usually calculated on a monthly basis.

The formula for calculating the runway

Runway = Cash flow / burn rate

Runway = Cash / (total expenses / # of months)

Runway = Cash * # of months / total expenses

An example of runway calculation

Let's assume that you have received an investment of 800,000 Euros. You spend about 50,000 Euros per month. 

runway = 800 000 / 50 000 = 16 months 

So your startup has sixteen months before it runs out of cash if your expenses and revenues stay the same. 

Why is the runway important?

There are common reasons for the closure of a startup, the second main cause of failure is the lack of liquidity. Hence the importance of calculating your runway. Otherwise, you will have to close your business and you risk having bad surprises. Calculating your runway allows you : 

1. Measure the time you have to make your business profitable or raise new funds;
2. Anticipate your expenses and prioritize according to your remaining cash flow and your net cash brown (= income - expenses);
3. Develop a viable budget and business plan;
4. Develop your financing strategy and cost structure;
5. Validate your company's business model and its reliability.

In other words, the runway is an indicator of the health of your business. It provides a snapshot of its profitability. If the runway drops drastically, it means that your company is spending more than it is taking in and that a change of strategy must be made before you run straight into bankruptcy and unpaid bills. 

How to lengthen your runway?

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As you can see, the runway is a very important indicator to evaluate your company and its sustainability. It is estimated that a good runway for a startup in seed to series A is around 15 months and for a startup between series A and series B, 18 months.

So how do you extend your runway? By decreasing your expenses and increasing your income! This is often easier said than done. So in concrete terms, there are three main ways to increase your runway: increase your business opportunities, decrease your costs and consider other non-dilutive sources of financing. 

Increase your business opportunities 

One of the ways to increase your runway is to increase your income. For this you can play on different strategies: 

1. Increase your prices slightly. Especially if you are a company operating on the subscription business model like SaaS. You can offer several licenses depending on the features with different prices;
2. Focus on high payers. If you're using a tiered pricing model, another way to increase your runway is to focus on acquiring higher-paying customers;
3. Diversify your customer base and create additional revenue streams. Experiment with new ways to increase your sales. There are many creative ways to increase sales without significantly increasing costs. For example, you can upsell or cross sell;
4. Analyze and reduce churn. If your business is subscription-based, revenue retention is just as important as new revenue generation. So put strategies in place to limit contract cancellations or contract contraction. 

Reduce your costs

Another part of your runway is your cost. One way to increase your runway is to decrease your expenses. In the same way, many methods are applicable to reduce your costs: 

1. Decrease your CAC. The CAC is the amount of money you spend to acquire a new customer. 
2. Increase your LTV/CAC ratio. This goes hand in hand with decreasing your CAC. LTV is a metric that tells you the sum of net gains generated by your customers over the course of their business with your company. Generally, a good LTV/CAC ratio is considered to be around 3:1. This means that your customer is bringing in three times more than they are costing you. This is a general rule of thumb. Ideally, you should have an LTV greater than your CAC. 
3. Eliminate your unnecessary expenses. When you try to remove unnecessary expenses, think about expenses that won't radically change the way your startup operates: whether it's logistics costs, software that you're only using half of its capacity... 

Consider alternative funding methods

While venture capital funding is attractive, it is not the only source of funding, especially for subscription and SaaS models.

You can even limit the distribution of your shares, so dear to the VCs but costly for your share capital. Non-dilutive financing solutions exist and can help you increase your runway. 

Crowdfunding

Crowdfunding allows you to launch campaigns and appeal to your community to raise donations or product advances.

Instead of giving away capital, you can offer rewards based on your participants' contributions. Crowdfunding can also allow you to bring forward a new product and test it with your regular customers. 

The debt

Debt remains a fairly common non-dilutive means of financing. Nevertheless, it is sometimes complex to obtain loans as a young company.

Your startup may not meet all the criteria for a loan approval given the potential risk involved. You also have to pay back your loan at a pre-determined interest rate. You can get it from traditional banks, credit unions or private lenders. 

Subsidies

Certain sectors of activity can benefit from subsidies. However, the process of obtaining them can be very complex and time consuming. Moreover, the criteria are not always transparent and it is difficult to obtain them. The advantage is that you don't have to pay back these grants. 

IRC and ITC

The Research Tax Credit (CIR) and the Innovation Tax Credit are two non-dilutive sources of funding that every young startup should apply for when launching its seed or making the transition from Seed to Series A. These aids, which are sometimes difficult to obtain administratively, can be handled by numerous organizations such as Sogedev, which will be able to guide you in the preparation of your applications.

Increasing the runway with RBF

Revenue Based Financing or RBF is a non-dilutive, transparent and fast (less than 48 hours) financing method. The investor provides you with a loan based on your revenue, which you repay based on your monthly revenue generated. There is no loss of capital and no hidden fees. 

As we have seen previously, the runway is crucial in assessing the survival of your business, especially between financing rounds. You may have a faster-than-expected cash burn rate or face unexpected expenses. RBF allows you to cushion these situations and increase your runway without diluting your capital. RBF comes into play. 

Instead of bringing forward your next fundraising, opt for revenue based financing to fund your growth without further diluting your equity. 

At Karmen, it's simple. We assess your loan eligibility within 48 hours and provide you with a payment schedule. It's fast, transparent and non-dilutive! 

As you grow, you may need to increase your runway for many reasons. This runway insures you against possible pivots, overcosts or irregular revenues that could affect your cash flow. By turning your future revenues into immediate cash flow, the RBF allows you to increase your runway. At Karmen, we help you reach the milestones of expansion without diluting your capital!