The Startup Runway: How to Calculate and Extend Your Runway

As a startup founder, you’ve probably heard people talk about “runway.” And they’re not talking about what airplanes land on. But what is it? Simply put, runway is a measurement of how long your startup can stay afloat before it runs out of runway (and needs to have “taken off”, like an airplane from a runway. Get it?). Once you run out of runway, you’re out of money.

The longer you can stretch out your runway, then the more breathing room you’re giving your startup to thrive. Startups are a tough business, and oftentimes founders will fail many times before they succeed. By following this guide and learning how to best manage your runway, you are giving you and your team your best chance of making it.

Understanding Startup Runway

Startup runway is the time your business can keep operating with the money you currently have. It shows how long you can stay open without making money or getting more funding (because you should never count on money you don’t have yet. That’s not “predicting revenue”, it’s blind hope). This simple concept is crucial for your startup’s survival and success.

Why Runway Matters

Runway is important for several key reasons:

• Cash Flow Management: Knowing your runway helps you control spending and make smart choices about hiring and resources. This is a crucial skill to show to any investors, and indicates you have the skills to be responsible with their money as well.
• Fundraising Planning: Understanding your runway helps you pick the right time to look for money from investors. How long will it take to close that round of investment? If it takes you 6 months to close a round and you only have 4 months of runway left, then you need to start adjusting your financial choices NOW.
• Business Planning: Your runway affects what long-term plans you can make (and afford), from product development to marketing and even investing in sales.
• Risk Control: By watching your runway closely, you can spot money problems early and fix them quickly.

Calculating Your Runway

The basic formula for calculating runway is simple:

Runway (in months) = Current Cash Reserves / Monthly Burn Rate

For example, if your startup has $100,000 in the bank and spends $20,000 per month, your runway is 5 months. But there’s more to consider for a complete picture.

Refining Your Calculation

To get a more accurate view of your runway, include these factors:

• Money Coming In:
  • Income: Add any money you expect to make from sales or services
  • Funding: Consider any upcoming investment or funding rounds
• Money Going Out:
  • Big Expenses: Account for one-time costs like equipment or office space
  • New Hires: Include the cost of planned team growth

Real-World Example:

Let’s look at how a real startup managed their runway effectively. This company started with $500,000 in seed funding and spent $40,000 monthly. They also began to make $15,000 each month from their first product starting in month 7.

Here’s how they calculated their runway:

• Starting Funding: $500K
• Monthly Net Expenses (Months 1-6): $40K
• Monthly Net Expenses (Months 7+): $40K - 15K = 25K

Runway =
$500K - (6 * $40K) = $260K remaining
$260K / $25K = ~11 months additional runway (Months 7 onwards)

Total runway = 6 months + 11 months = 17 months.

This careful calculation gave this company almost 1.5 years to grow their business before needing more funding.

Strategies to Make Your Runway Last Longer

1. Cut Costs Wisely

Smart ways to reduce your monthly spending include:

• Review Operating Costs: Check all your expenses and find better deals with suppliers. Don’t be afraid to negotiate
• Smart Hiring: Use freelancers for specific projects instead of full-time staff when possible. Consider outsourcing when possible to save you time and generate revenue faster, even if it costs a little more
• Smart Firing: Don’t get emotional, when your business is on the line, only keep your necessary people. Don’t let your business fail because you felt guilted into keeping people on the payroll that weren’t moving the needle enough
• Choose Affordable Tools: Start with basic software versions and upgrade only when needed
• Use AI when possible: While AI can’t yet replace staff, it can make your existing staff more effective by becoming a force multiplier

2. Boost Your Income

You can also stretch your runway indefinitely by boosting revenue and getting in the black, by making more money than you spend each month:

• Focus on Sales: If your product is stable, temporarily cut development costs to reroute those funds to Sales people that generate additional revenue
• Add New Revenue Streams: Look for different ways to make money from your product or service (i.e. new customer bases/ICPs), or look for new ways to sell to your existing customer base. More on this to come!
• Review Your Pricing: Make sure your prices match what customers will pay

3. Manage Cash Flow Better

Improve how money moves through your business:

• Payment Terms: Ask suppliers if you can pay over longer periods
• Invoice Management: Send bills quickly and follow up on late payments
• Short-term Options: Consider using credit lines when needed
• Negotiate: Sometimes some money is better than no money. Ask your supplier/vendor if they have any flexibility on their payment terms. It never hurts to ask!

4. Find Strategic Partners and Funding

Options to get more funding include:

• Angel Investors: Connect with early-stage investors
• Crowdfunding: Use platforms to raise money from many people
• Business Partners: Work with larger companies that can help you grow
• Government Support: Look for grants and programs in your industry

Part of running a startup is learning how to be fiscally responsible and be able to accurately predict the financial future of your company. By understanding your runway and your financial limitations (or lack thereof) you can make more informed decisions with regards to how you invest your company’s resources to best achieve success.