Imagine your startup as a plane. You've put in months of hard work, and you're finally ready to fly. But before reaching cruising altitude, you need to build up enough speed to take off. This is your runway.
Your startup’s runway is the amount of time, in cash, that your company can run without a new infusion of revenue. It is the calculation for how long you have to set up your team, get your business model operational, and start making money. As the metaphor suggests, the ultimate goal is to reach take-off velocity before the end of your runway.
The longer your runway, the more time you have to get your team and your operations in order to reach your critical self-sustaining rate of revenue generation. As you scale, naturally your burn rate will as well. That’s why it’s vital to have a good runway at the outset and maintain it for as long as necessary to reach your launch velocity.
Runway Planning for Your Startup
In order to calculate your runway, you first need to understand your burn rate. How much capital do you have? How much revenue are you generating? And how much of that are you burning through (and how quickly)? More profit contributes to a longer runway, which means your startup can survive its early years. You may raise a large round of investment in the early days to fund operations until you find product market fit, or you may plan to secure cash infusions in stages as you reach certain milestones. However, what matters most now is how long your cash will last in the face of your expenses.
Let's start by calculating your net burn rate and how this affects your runway.
Capital vs Net Burn Rate
Your net burn rate is how much money it takes to operate for a single month, quarter, or year. You can do this on paper and should track whether you are meeting your burn rate goals in practice.
To weigh your burn rate in reality, calculate how much money you have at the beginning and end of the month. Three months of measurements will give you an operating average.
Your startup’s runway is your total cash divided by your monthly burn rate. This will give you the number of months you can operate before generating enough revenue to take flight.
Example Runway Calculation
Let's say your starting capital is $300,000. You've calculated that your monthly burn rate is $20,000, including rent, payroll, marketing, software, and so on. Calculate your runway by dividing 300K by 20K, which comes out to 15 months, or just over a year of runway, with some margin for unexpected expenses.
- Capital: $300,000
- Burn Rate: $20,000 / month
- Runway = Capital / Burn Rate = $300,000 / $20,000
- Runway: 15 months
Minimum Runway Length for Launch
How long does your startup runway need to be? This is something every entrepreneur and startup leader needs to know.
While the answer is unique to each business model, startups typically need between 12-18 months. Whether you are pacing your spending between rounds of investor funding or operating off of your current balance sheet, 12-18 months is about the time most startups plan to reach launch velocity.
This means you will need your startup runway to cover your monthly burn rate multiplied by 12-18. You will also want to plan for the unexpected, as unforeseen costs and setbacks are all part of the game.
Calculating for a Longer Runway
Having a longer runway is always a good thing. It gives you a greater margin of error, padding for unforeseen costs, and the ability to be more flexible in your planning.
If you have runway "leftover," it naturally becomes operating capital and seed money for your next expansion. With an efficient team and low overhead, you'll enjoy a larger percentage of your revenue as profit year after year.
You can also seek to extend your runway before and during the startup process. There are many useful and adaptable ways to extend your startup runway.
Methods to Extend Your Startup Runway
What can you do to extend your startup’s runway? Whether you’re still figuring out your product market fit or are already generating revenue, there are methods to make your cash go further.
The simplest way to extend the length of your runway is by tightly managing your expenses while you find product market fit. Lowering overhead, cutting unnecessary costs, and even deferring certain costs, can often significantly extend your runway. Of course, you can also extend your runway by bringing in more money through new investors or by increasing sales.
Both approaches can help you extend your runway until your startup is ready to scale.
Seek Flexible Ways to Increase Sales
Generating revenue isn’t always about gaining a buck; it’s about flexibility. Sometimes you have to meet customers halfway. That can mean creating custom pricing models or adopting new ways of monetization to attract more people.
Offering a free trial entices customers to try your product before committing fully. It introduces them to your business without strings attached. If you have a strong product, they are likely to opt-in at full price when the trial ends.
You can also offer a premium upgrade at a lower cost. You might think you’re losing money, but that could be the turning point for converting a visitor into a lifelong customer.
Finance Your Software and Infrastructure Expenses
One of the biggest hits to your runway is large up-front payments for infrastructure and software purchases. Many startups seek monthly payments over annual subscription fees to reduce the impact on their runway calculation. For example, investing tens of thousands of dollars upfront on software can significantly shorten your runway and add risk to your business.
With a financing tool like Gynger, you can distribute the payment for these purchases over time. Software financing turns any lump sum payment into a more efficient, monthly payment plan, designed to maximize runway.
Gynger pays your software providers up-front, while you pay them back in a payment model that is more in line with your calculated burn rate and runway needs.
In short, you can turn large startup expenses into simplified and more affordable monthly payments.
Reaching Your Next Round of Funding
Startups often gather the runway needed in multiple fundraising rounds. These funding rounds are anticipated by your investors, but they are never guaranteed, can take months to secure, and come with hefty dilution to your equity stake. This lines up another great use case for contract financing: If you need to extend your runway to reach the next round of funding, Gynger makes it possible to reduce your burn rate by breaking down upfront costs due in the near term over a longer period of time.
Extend Your Runway With Software Financing
Launching your startup is all about velocity and momentum. By lightening your financial burden, you can extend your runway and improve the likelihood of success. Gynger is designed to do just that. We help you gain access to the tools you need without the drain of massive upfront software costs.
All startups and early-stage businesses are calculating their monthly cash burn. There is tremendous value to be gained by using the best software and infrastructure products, you might not be able to commit to high annual upfront costs without shortening your runway.
Here at Gynger, we make it easy for you to get the tools you need with strategic financing options designed to put the purchasing power in your hands. We'll pay your vendor(s) for you while you pay us back later on your terms.
Contact us to learn more.