Let's get straight to the point: cash runway is the most important metric for early-stage startups. And you can be sure that investors will ask you about it. Understanding what cash runway is, how to calculate it, and what counts as a healthy cash runway is essential for any startup. Let's get started.
Why Is Cash Runway Important?
First off, let's demystify some terms. The cash burn rate is the rate at which a startup spends its cash, while the cash runway is the number of months until the cash runs out. These concepts are straightforward, but the real challenge is getting the calculations right. Startups, unlike their larger counterparts, often grapple with unpredictable revenues and expenses, making it tough to forecast cash flow accurately.
This is precisely why having a solid financial model is more critical for startups than for established companies. The more detailed and accurate your financial plan for the coming months, the more convincingly you can discuss your cash runway with investors.
Why It Matters to Your Startup
For founders, this isn't just about satisfying investors. When you're raising funds—a process nobody finds thrilling—you want to do it as infrequently as possible. Your goal is to use that capital to fuel growth, not to get bogged down in endless fundraising. Having dependable financial projections means that once you secure funding, you're in a good position to hit the targets you've set for your startup.
How to Calculate Your Startup's Cash Runway?
Easy! The formula to calculate your startup's cash runway in incredibly simple:
Cash Runway = Current Cash Balance / Monthly Cash Net Burn
Keep in mind: It's important to focus on the net burn rather than just the gross burn. Net burn factors in your revenue minus operating expenses, while gross burn only looks at the expenses. Considering potential future revenue is also crucial, as it can extend your cash runway.
Role of Financial Models in Calculating Cash Runway
I can't emphasize enough how vital a financial model is for your startup. When you start translating your business into numbers, you'll likely uncover costs you hadn't thought of before. Creating a financial model helps you ask the right questions and uncover aspects of your startup's finances that might have been overlooked.
This oversight is why many founders underestimate their cash runway, leading to all-too-common cash flow crunches. Remember, over 45% of startups fail because they run out of cash. A well-thought-out plan not only refines your idea but also arms you against future challenges.
To help out, we've created financial models that are highly user-friendly and tailored to different industries: SaaS, Ecommerce, Mobile App, Fintech and Marketplace. These tools are essential for securing funding and have been refined based on feedback from real investors.
How Much Cash Runway Should Your Startup Have?
There's no one-size-fits-all answer for the ideal cash runway. Ideally, you'd have enough to reach profitability. However, most startups need several funding rounds before they get there. Striving for market share rather than immediate profits often makes more sense.
Despite conventional wisdom suggesting 12-18 months, try to aim for a cash runway of 16-24 months between funding rounds. This range is backed by insights from various venture capital firms and accelerators, which typically recommend no less than 18 months.
When Should You Panic? The Startup Red Zone
As a founder, navigating uncertainties and cash flow issues comes with the job. Most startups find themselves with shorter runways than they'd like. But it's crucial to know when to worry. Industry experts like Paul Graham and Peter Sandberg point out that the "red zone" begins when you're down to three months of runway. Beyond this point, securing investment becomes much tougher.
To avoid this dire situation, keep a close eye on your cash runway and continuously update your financial model. Staying prepared is key to securing the funding you need, when you need it.
