Runway is the amount of time it takes a company to burn through its cash reserves before needing to raise capital or generate profits. This is an important metric for startups as it helps investors determine how much funding they need and when to raise additional funds. It can also be used by startups to plan their business strategy and budget accordingly.
Runway is typically measured in months, and the longer the runway, the more time a startup has to become profitable without seeking additional funding. Generally speaking, startups should aim for an 18-24 month runway when raising funds. This allows them enough time to build their product and get customer validation before they need to worry about financing again. It's also important to note that the longer a startup has runway, the more likely they are to get better terms when seeking out funding.
When determining how much funding you really need, it’s essential to consider your current and projected expenses over time. This will help you determine exactly how long you’ll need your runway to be before you can become profitable or need to raise additional funds. It’s also important to factor in any potential changes such as team expansion, product development, marketing campaigns, and more.
To get started, create a plan for your overall cash requirements. Avoid designing your approach solely based on your desired valuation, and instead, base it on your realistic valuation. Three-pointers to consider include:
- Projected income
- Estimated expenses
- Expected growth rate
Showing solid potential for business revenue will lead investors to accept a lower equity stake in exchange for the same amount of capital investment and will also impact how much funding you can raise in your round.
Ultimately, determining how much funding your business needs is a balancing act. It’s important to create a realistic financial plan that maximizes both your runway and equity stake while also providing sufficient funds for product growth and development.