Why Startup Runway Is Important and How You Can Optimize It

Why Startup Runway Is Important and How You Can Optimize It

The startup runway decides whether you take off and soar high or crash and burn!

What is more difficult than launching a startup? Keeping it up and running. A new business always has a ticking clock to either make it big or close up shop. As of 2021, about 20% of startups would shut down within the first year of operation. 

One of the biggest reasons a startup ends up shutting down is the lack of funds. It is precisely why it is essential to know what your startup runway looks like. A startup runaway refers to the amount of time before your startup runs out of money at its current rate of income and expenditure. Let’s take a closer look at how you can calculate your startup runway and stretch it out to help you make the most of your business’s funds. 

What is the startup runway?

Imagine the startup runway as a plane’s actual runway where it takes off or lands. How big this runway is would depend on the size and weight of the plane. Similarly, the amount of money a startup needs to keep itself afloat depends on the product or service it offers. According to experts, on average, startups need to have a runway of 18-21 months

But to figure out your startup’s runway, in particular, you would have to find out what your startup’s gross burn rate and net burn rate are. 

Gross burn rate

The gross burn rate is the amount of money your startup spends each month. It is calculated by subtracting the remaining funds from the original amount of fund and dividing it by 12 months. For instance, let’s say you have US$100,000 in your bank account at the beginning of the year and are left with US$30,000 at the end of the year. Then your gross burn rate would be US$5,833.33. 

Net burn rate

Net burn rate refers to the speed at which you are losing money. It is the difference between the amount of money coming in and the amount going out of the organization. To calculate this, you can subtract your company’s monthly earnings from the gross burn rate. Following the same example in the previous section—if you make US$2,000 per month, your net burn rate would be US$3833.33.

You can find out your startup runway by dividing the amount of money you had at the beginning (i.e., US$100,000) by your net burn rate (i.e., US$3833.33). It will give you the number of months (i.e., 26) before your company goes bust. 

How to stretch out your startup runway 

To extend your startup’s runway, you need to reduce the burn rate. That is, you have to increase cash inflow and reduce spending. Here are some ways to achieve this: 

Cost-cutting

If certain products and services your company offers are not making you any money, it is time to cut your losses and stop providing them. Another major cost a company has to bear is employee payments. You can cut costs by hiring more interns or outsourcing jobs instead of full-time employees. The full-time employees you do end up hiring should be those who can wear multiple hats at once. You can also consider using co-working spaces instead of renting your own office space to cut costs. 

Increasing funding

Another way to reduce your burn rate is by bringing in more money through fundraising. But instead of raising funds through venture capital, which would dilute your equity, you can use alternative routes, like revenue sharing. 

Revenue sharing is a funding strategy where a business borrows money from an investor and ties its repayment to the amount of revenue generated. So, when the business thrives, the repayment amount increases; when your income falls, so does the repayment. You can also consider using a corporate credit card to tide you over in critical situations.

Create an emergency fund

Finally, planning in advance is the best way to stretch your startup runway. Creating an emergency fund will save you the trouble of cutting costs when the going gets tough. The emergency fund should ideally be big enough to cover expenses between three months to a year. It should allow you to continue making your current expenses and have room to cover any additional costs the company may incur. 

Overall, business owners must prepare for the worst. To do so, you must actively track your startup runway regularly. If you plan and budget everything well before you start, you wouldn’t have to worry too much about not having enough funds to make your startup succeed. If you do end up in a cash crunch, cutting costs wherever possible and using emergency funds should be enough to help you sail through the turbulent seas of the global startup ecosystem. 

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Header image courtesy of Freepik

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