What is Startup Runway? Strategies to Reduce Cash Burn & Extend Your Startup Runway

How Much Startup Runway Should You Raise?

According to Silicon Valley Bank (SVB), companies should raise enough to last 12-18 months. However, this figure is a reference, not a rigid benchmark.

Moreover, SVB’s 2022 report on investor trends says that over the past few years, founders could have gotten away with a 12-18-month plan. But today, investors want a longer-term outlook, i.e., a 24-36-month plan. They might not want to invest unless you can hit milestones within that period.

An expert-recommended tip is to cover operational expenses, scale to valuation, and sustain capital till the next round.

“The general rule of thumb is you want to have enough runway to manage your business through a milestone that drives valuation and increases the odds of a successful fundraising,” says Mimi Ghosh, Vice President, Technology & Disruptive Commerce Group, J.P. Morgan

Ankur Shrivastava, co-founder of Globevestor and seed VC at Momentum Capital, explains the maths behind having a minimum of 18 months of runway. Here’s what he says:

• When going through the final paperwork stages of the next funding, you should have 2 months of runway. This protects you from last-minute renegotiations.

• Now, it takes approximately 6 months to close series A paperwork. This involves multiple discussions to get a term sheet, followed by agreement drafting, various filings, and closure activities.

• Keeping a 10-month working capital for execution is imperative. This includes 5 months of building and experimenting + 5 months of applying those learning to nurture growth.

• If you raise for less than 18 months, say 12 months, you'll have to attract VC's interest and begin the conversation from the 6th month. This shortens your execution period. Plus, you might not achieve 3-5X growth on key metrics to show to potential investors.

Hence, the rule is: 

5 months of build/experiment + 5 months of apply/grow + 6 months fundraise + 2 months buffer = 18 months.

Your ideal runway amount depends on multiple factors, including the funding stage, monthly expenses, and allocation of company money. The key is having enough time for essential projects to reach the finish line and wiggle room to line up additional funding.

Mistakes to Avoid During Fundraising Based on Runway

Your funding amount and organisational cash flows largely determine your runway length. Avoiding the following mistakes during fundraising and expense management can keep you going longer.

1. Lack of Communication 

Failing to communicate about unauthorised purchases or the timely resolution of overspending areas hurts your cash flows. This is even more challenging in remote work setups.

Let's say you decided to cut down the marketing budget by 20% but employees weren't aware of the same. So they executed campaign corresponding to the old budget. This will impact purchases across other categories as per the revised budget.

2. Not Planning for the Unexpected 

Founders often overlook unplanned or spontaneous expenses while deciding the funding amount. From losing your highest-paying client to losing a team member, your business can encounter numerous unforeseen challenges.

Raise a little more than what you consider ‘enough’. Include a buffer amount in your ask to cover up the unexpected expenses.

3. Raising Too Little

Raising too little creates a requirement for raising frequently. You will be wasting much time preparing for funding rounds again and again rather than focusing on core operations.

Apart from this, what if there happens to be a funding winter when you decide to raise next? Securing sufficient funds while situations are favourable keeps you on the safe side.

4. Raising Too Much

On the other extreme, raising too much elevates the expectations of your current investors, particularly if you raise it at a high valuation. You must have delivered on your previous round valuation in the next round, or you won’t be trusted with another round.

Also, giving up too much equity to raise more startup runway makes your startup less interesting for investors in the upcoming rounds.

5. Thinking Yearly, Not Monthly

While five years of planning is a common notion in the business landscape, it's impractical for early-stage companies. “When you have a limited amount of funds, you have to think on a monthly basis”, says Francis Chmelir, a startup consultant.

How to Reduce Your Cash Burn?

The less cash you burn, the longer your runway. Here’s how you can bring down the burn rate without sacrificing growth:

1. Perform Cash Burn Analysis
2. Look for Cost-Friendly Loan Options
3. Cut Overhead Expenses
4. Establish Approval Policies
5. Re-evaluate Your SaaS Subscriptions

1. Perform Cash Burn Analysis

This involves carrying out monthly expense reports and understanding your expense patterns. Identify overspending areas, cost-saving opportunities, and redundant purchases.

For instance, you can analyse vendor performance and compare it with agreement terms. There might be a possibility to re-negotiate and save money.

Real-time visibility into your business transactions eases supplier performance monitoring and cash burn analysis.

2. Look for Cost-Friendly Loan Options

Interest-only loans require you to pay only an interest amount for the first five to seven years. You don't have to pay the principal amount for the initial years

Another good loan option is a line of credit business loan, where you only pay interest on the credit amount you use.

However, there are certain drawbacks associated with both of these options. Consider them carefully before making a decision.

Interest-only loans are often available only for businesses with high credit scores. Once the interest period ends, you are required to pay both the principal and interest amount, which can be costly in the long term. Also, these loans have higher interest rates than other options.

Being an unsecured business loan, the line of credit requires a strong credit history. These have higher interest rates and shorter repayment periods. The delay in repaying the borrowed amount can impact your business’s creditworthiness.

3. Cut Overhead Expenses

Adopting a remote or hybrid working model can help save significant cash. Six out of 10 employers identified cost-saving as a top remote working benefit in a survey by Global Workspace Analytics. 

First, it eliminates the cost of owning or renting an office. Next, it removes expenses like office supplies, cleaning services, and electricity bills.

According to Deloitte, labour comprises 50%-60% of the company's cost. Therefore, another cost-saving strategy is hiring freelancers, independent contractors, and virtual CFOs. These are skilled people offering part-time services. 

Unlike full-time employees, you don’t have to pay them fixed monthly salaries. Only pay for the amount of work done with flexible payment terms. Additionally, they aren’t eligible for the company's insurance policy, receiving medical reimbursements, or holiday packages.

4. Establish Approval Policies

Overspending and unauthorised purchases are the biggest contributors to cash burn. When any staff member makes a purchase without following proper regulations or violates the company's procurement policy, it impacts your budgeting. These will continue until you set some ground rules regarding purchase approvals.

Establish a clear policy that states a fixed spending limit for every expense, from office supplies to marketing activities. Ensure your staff knows which expenses can be made autonomously and which need further approvals

For instance, a marketing team can spend on SaaS costing up to ₹60,000 a year. Beyond this, the expense needs approvals from the concerned stakeholders, per the policy.

5. Re-evaluate Your SaaS Subscriptions

Unused or underutilised SaaS tools and subscriptions account for 32% of the company’s spend. Use the 3E rule to rectify and remove wasteful SaaS services.

• Evaluate - the ROI VS cost ratio for each tool
• Examine - which of these tools adds up to efficiency or bottom-line performance and which ones can be downgraded without losing the most useful features
• Eliminate - tools that don't compensate the cost with ROI and aren't adding value to your business 

How to Extend Your Runway: 6 Effective Tips

1. Automate Accounts Payable 

Automating accounts payable processes involves implementing software or systems to streamline and digitise vendor invoices, payments, and expense management. By leveraging automation tools, NACs can achieve greater efficiency, accuracy, and control over their financial operations.

Invest in specialised accounts payable software that automates invoice processing, approval workflows, and payment scheduling. Transition from traditional paper cheques to electronic payment methods such as ACH transfers, wire transfers, or virtual credit cards. 

Finally, define clear approval workflows for invoice processing to ensure timely and accurate payments. Automated approval workflows route invoices to the appropriate stakeholders for review and approval based on predefined criteria, such as invoice amount, vendor, or expense category.

2. Use Corporate Credit Cards

Business credit cards offer companies higher limits without a risky personal guarantee or lengthy approval process, rewards, and perks. Moreover, using prepaid employee expense cards also avoids exceeding budgets and reduces cash burn.

However, do your research before opting for any corporate card. Review the rules, advantages, or downsides associated with them.

3. Setup Receivables Policies

‍

The time frame you allow your clients to clear outstanding invoices impacts your burn rate in that period. Hence, having a policy to manage your receivables is important. 

Define payment terms, permissible timeframe, and late payment charges for your clients. Set a timeframe that enables you to manage all expenses in a particular month without incurring any debts or disturbing the coming month’s expenses. 

4. Increase Sales

Leverage upselling and cross-selling to current customers to increase sales. Trying different pricing strategies or expanding into an adjacent market is also a viable option.

Besides this, you can explore specific discounts. Offer discounts in return for video testimonials and case studies. Use these testimonials and case studies to get more customers. 

5. Create Emergency Fund

We talked of unexpected challenges in the previous section, creating an emergency fund helps you navigate through the same. It’s your safety net to accommodate unforeseen expenses in case you cannot secure funding as per the planned time.

Keep aside a certain amount of money you won’t use for regular expenses. Remember we recently talked about the buffer amount, which you must include during fundraising? Allot that amount to your emergency fund. 

Review your past 6-8 months’ balance sheet and income statements. They tell you about monthly expenses. A thumb rule is to have sufficient funds to cover expenses for at least 6 months.

6. Create ESOPs

An early-stage company might not be capable of offering huge salary packages to talented employees. Employee stock option plans (ESOPs) enable employees to own equity in the company. The share percentage, taxes, and vesting period are pre-mentioned in the agreement.

Issuing ESOPs is a strategic way to save payroll costs. This allows the company to retain top talent without high compensation. Employee salaries consume less of the company’s funding and extend the runway.

How Mysa Helps Founders Manage Their Startup Runway?

Maximise your runway with Mysa's robust solutions. Access tools and features designed for new-age companies to reduce expenditures, optimise financial resources, and accelerate growth.

• Cut costs by hiring a virtual CA: CAs can be expensive unless it's Mysa's intelligent virtual CA. Get auditing assistance, accurate tax filing, and timely reconciliations while maintaining maximum cost efficiency.
• Move faster with automated tax payouts and payroll: Never lose money due to inaccurate tax deductions, lack of compliance, or prolonged accounting timelines. Mysa automates payroll and taxes, all the while ensuring compliance regulations and precise GST/TDS calculations.
• Plan better with immaculate balance sheets: Mysa offers integration with Zoho to maintain correct and consistent balance sheets. Make accurate financial forecasts with clean financial records. Extract clues to reduce cash burn with a clear picture of expenses.
• Preserve more cash with a quick and simple ESOP calculator: Calculating ESOP pool size can be complex, hectic, and time-consuming. Mysa makes it hassle-free for you. Input the company stage, valuation, and share price and let Mysa's calculator take over. Retain your best employees without giving away a high compensation package.
• Make informed financial decisions with a real-time cash flow dashboard: Gain real-time visibility into your cash flows with detailed cash flow analysis. Get insights to improve your runway with weekly and monthly financial reports in your inbox. Tap cost-saving opportunities, reduce rogue spending at the earliest, and revise budgets quickly.
• Keep everyone together and execute cost control strategies smoothly through centralised communication: Save money on buying another tool for communication. Mysa offers built-in Slack integration to keep everyone in the team updated about revised budgets, approvals, or expense policy changes. No more killing time on back-and-forth emails or missing important updates due to segmented communication.

‍