May 26, 2022

recently An investor’s call, the CEO calmly said, “We only have two months of runway left.”

The fact that we were on Zoom couldn’t hide the reaction of investors – some turned pale. As an angel investor, I have dealt with variations of this scenario, some of which are more consistent than others. Fortunately, this doesn’t happen often.

In the same way that airplanes need a minimum runway to take off and land safely, startups need sufficient funding to serve the product market. I use the runway as a metaphor to describe how much money a company has before it runs out.

The size and weight of the aircraft determine the length of the runway. Similarly, the amount of money a startup needs depends on what it does. A life sciences company seeking FDA approval usually needs more than a SaaS startup.

It is important to determine as accurately as possible the runway you need and contingencies. Otherwise, if your company is short on cash, you risk getting a “favourite sale” value for the company. Or worse, your company may be forced to shut down.

Here are five ideas to keep in mind when thinking about runways.

Use this simple equation: Divide your available funds by your monthly expenses and then add in income such as compensation.

How many runways do you need?

Seed and Series A companies must plan their runway at least 12 to 18 months in advance. Set aside as much money as possible specifically for product development or revenue growth so you have more time to grow and make significant progress. A positive cash flow will benefit your next funding round or make your company more sustainable.

It is important to use capital efficiently and only use money to increase sales, improve product development, or both.

If your company earns one dollar for every dollar spent on product development or product development, its capital efficiency ratio is 1:1. The pursuit of capital efficiency encourages you to make smarter business decisions about cost adjustments before increasing your investments.

The life sciences company I invested in had contracts with several organizations to supply the specialty chemistry needed to develop the product. Instead of awarding large contracts to each of these organizations, the company entered into smaller contracts with them and, based on performance, awarded the larger contract to the company that provided the most value.

To calculate how much runway your business needs, you need to determine the burnout rate: the amount it takes to run your business offset by revenue. Specifically, calculate your monthly expenses: factor in salaries, overheads, capital requirements, marketing, research and development expenses, and other expenses along with income.

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