Understanding runway is crucial for founders, yet many mistakenly reduce it to mere calculations. Venture capitalists (VCs) expect a broader perspective. Sequoia Capital has proposed a framework that guides founders in approaching runway thoughtfully. This article will explore:

• The reality of runway
• How to assess your current runway and calculate it accurately
• The necessary runway for future growth
• Strategies to extend your runway when needed

Let’s delve deeper...

What Exactly Is Runway?

Runway can be simply defined as the total cash available divided by the monthly expenditure.

For instance, if you possess $10 million in cash and incur $500,000 in monthly expenses, you effectively have 20 months of runway.

However, this view is more complex than it seems. The most straightforward way to assess your cash is through net cash, which is the cash on your balance sheet after subtracting any borrowed funds.

If you have $10 million in cash but have taken on $5 million in venture debt, your true net cash is only $5 million. This figure should guide your runway calculations.

Why is this important? Debt is not your own money; it's borrowed and owed to others. Just as personal finances consider assets minus liabilities, the same principle applies to your company's cash status.

While having a credit line can be a lifesaver in times of need, utilizing it can complicate future fundraising efforts. It may signal concerns to investors and can create issues with ownership stakes. Therefore, if cash is tight, consider obtaining a venture debt line, but do not factor it into your runway unless absolutely necessary.

Understanding Monthly Burn

Monthly burn differs from net income.

Net income is an accounting term, while burn refers to cash inflow versus outflow.

It's essential to recognize expenses not reflected in your monthly profit and loss statement, such as upfront inventory purchases or capital expenditures. A firm grasp on your cash burn is vital. There are potential ways to align earnings before interest and taxes (EBIT) with free cash flow—such as delaying supplier payments or accelerating revenue collection.

If your business model requires upfront cash for inventory or capital expenses, maintaining a precise forecast of these costs is critical. Poor management could drastically shorten your anticipated runway.

Runway Is Not Static

Just because you estimate having eight years of runway doesn't mean you can afford to ignore it. As your revenue and expenses fluctuate, so too will your runway. Stay vigilant and reassess your burn rate monthly.

A Framework for Founders: Runway and Milestones

Previously, I noted that fundraising isn't merely about extending your runway; it's about achieving your milestones.

As a founder, consider how you interpret this data. Collaborating with your CFO, you might create projections that visualize cash flow changes over time.

This projection indicates when you need to consider raising capital again.

Understanding runway is tied intricately to hitting valuation milestones.

When driving on a highway, the critical factor is whether you have enough gas to reach the next service station, not just how much fuel is left. Your next fundraising goal—whether it's an up, flat, or down round—should be clear, and it will likely connect to a specific valuation milestone. Identify the key performance indicators that will help you reach your objectives.

The Balancing Act

Before depleting your cash reserves, ensure that your fundamentals are solid enough to achieve the next valuation target.

These factors are interconnected. You must find a balance between investing in growth and managing cash burn to maintain enough runway to meet your upcoming milestones.

Relying solely on narrative when seeking funding is no longer sufficient.

In a market where capital is scarce, investors are increasingly focused on your metrics and financial health. It's crucial to ensure that your valuation milestones are on track.

After evaluating your runway alongside your metrics and fundamental valuation drivers, you may find yourself in one of three scenarios:

1. Bucket 1: Less than 12 months of runway—focus intensely on your runway.
2. Bucket 2: 12 months of runway but insufficient for a rational flat round—critical focus needed here.
3. Bucket 3: Sufficient runway for a flat round, up round, or to achieve cash flow positivity—continue optimizing.

Many founders might think they are in Bucket 3 when they are actually in Bucket 2. The financial requirements for your next round have shifted, raising the bar significantly. It’s vital to manage your runway diligently, regardless of how much cash you believe you have left.

Extending Your Runway

Assuming you need to enhance your runway, the pressing question is: How can you achieve this?

While it sounds straightforward, executing it is challenging.

Begin by gaining a thorough understanding of your current financial situation. If you’re discussing runway, it likely means you're facing monthly losses. Identify the sources of these losses to recognize which expenditures contribute to your growth and which do not.

To tackle your financials, start with the overall picture, breaking it down into segments. Analyze your net loss by separating it into gross margin and operating expenses.

Continue dissecting these components until you have a granular view of what drives your total net loss.

Once you pinpoint the major contributors to your burn, assess their impact versus the ease of implementation:

Typically, high-impact changes will require significant effort. This analysis will help you prioritize actions to extend your runway.

With an understanding of the levers at your disposal, set a specific goal. This should revolve around the timeframe needed to reach your next rational milestone. If you're aiming for a flat round, realistically, that could take three years.

Here’s why:

• If your last round was raised at a billion-dollar valuation while generating $5 to $10 million in annual recurring revenue (ARR), you may need $75 to $100 million in ARR for your next round.
• Achieving such growth could take 10 to 15 times your current revenue.
• This process will likely span three to four years.

Given this, aim for a runway of at least four years. This accounts for the necessity to secure funding a year before exhausting your cash reserves. Investors prefer to see a healthy runway when considering a funding round.

Be realistic about your timeline. Consult public comparisons and engage your most critical board member to assess what it will genuinely take to hit your goals, then add 12 months.

You’ve now evaluated your position, examined your financials, plotted your options, and established a goal based on rational milestones.

Suppose you need to reduce your burn from $3 million to $2 million monthly. This will be a challenging undertaking. Personnel reductions are tough decisions, and you may encounter additional complex choices:

• Reevaluating global market strategies.
• Adjusting marketing and sales investments.
• Considering price increases, a daunting prospect without fully validated value propositions.

Remember, taking necessary actions to extend your runway in line with rational milestones will ultimately benefit both you and your organization.

In summary:

• You likely require more runway than you initially believe.
• Your next funding round will depend heavily on your metrics, as reflected in your financials.
• Be honest about your current financial standing; many companies are in Bucket 2 and need to make adjustments.
• You possess the capability to succeed. We are here to assist you in this journey.

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