What is the similarity between startups and the airplane on the airport runway?
Airplanes when they reach the end of the runway they have 3 options –
- take-off,
- cruise ahead or
- bail out before it’s too late.
Obviously, it takes off!
The similarity is of the situation!
Startups are most often asked by investors about how much runway period is left with them?
Startup’s runway period means how much cashflow it has over the weeks to remain operational, if income and expenses are kept constant.
If a startup does not have the runway period left, then it has to act to keep the enterprise floating. Either get funds to stay in the market or to control the expenses to get more time but either way the “brakes”. (unlike the airplane does not apply to startups).
For e.g.: A startup is spending (burning) INR 10,000/ month with INR 1,00,000 in bank account. This means that the startup has 10 month of runway period left.
In this scenario a startup has to not only sell the product (Marketing, sales etc.) but also has to conserve the cash balance higher than the burn.
According to CBinsights, not having enough runway period is amongst the top reasons for the failure of startups.
Let’s look at how it is calculated.
The most basic method:
Net burn rate = Expense — Revenue
Runway = Cash in bank/ burn rate
In above calculations, the revenue remains constant, and expenses steadily increase
Because in reality the revenue growth might not be at the rate which you would have forecasted. As the enterprise grows, sales & marketing cost, salary cost, office rent & other expenses will go up.
Best practice would be to keep the estimates highly conservative in nature along with the method explained above.
So, how much runway period is enough?
In practice, 18 months is considered to be the minimum runway period.
The reasoning behind this is:
- Raising money takes 3 -9 months, sometimes even more.
- Deployment of the received funds for building/marketing/selling the product always takes longer than anticipated.
- Subtracting months for fundraising and time of usage of funds for the scalability of the product we are left with 12 months to proceed.
Maintaining a healthy runway period requires both investors and startups right from day 1 to track and measure the right metrics ensuring financial discipline.
We at Auxano, have been instilling the need for regular information flow of KPI’s (key performance indicators) amongst our portfolio companies.
More on the same can be read at The Capitalist- Special issue of Entrepreneur Media who covered, Founding Partner of Auxano Capital, Mr. Brijesh Damodaran’s thoughts on the approach startups need to take to maintain the healthy runway period.
To conclude, the idea is to secure enough runway to help propel to the next level of growth. For ensuring this to happen forecasting the revenue numbers with concrete market data along with tracking and measuring every expense that you will incur becomes critical to measure.
Author(s)
Dr. Archit Shah
