Planning a Funding Runway

An interesting discussion on Cofounders Lab today that talks about planning a round of fundraising in terms of runway.

"Runway" and "burn rate" are two important factors when considering a fundraising round (and when operating a startup business in general). 

Runway: the amount of time (usually in months) that you have until your company runs out of money.

Burn rate: the amount of money the company spends to operate in excess of income. For early-stage companies the largest contributor to high burn rates is usually salaries.

Obviously runway and burn rate are inversely related (i.e. the lower the burn rate, the longer the runway). 

I raise these two pieces of terminology because they directly impact your fundraising efforts. Pegging your first round of funding (and later rounds as well) should be an intellectual and business-oriented exercise. But it's easy to get mired in questions like "how much can I realistically raise?" or "how much have competing companies raised?" Neither of those will lead you to a productive answer. But, here are a few questions you can ask to get to a better sense of your funding needs:

-What milestones am I trying to achieve through this round of funding?

-What resources (marketing, product development, new hires, expansion) do I need to achieve those milestones?

-What would be the projected monthly cost of those resources?

-How long will it take to achieve those milestones with the planned resources?

-How long will it take to achieve those milestones if planned resources are cut in half? Quartered?

Starting with milestone achievement is an important element of fundraising, because it provides a level-setting function on expectations. When pitching investors, you want to tell them what their money is going towards and what the company can expect to achieve in terms of results. 

As a sidebar: if you're at a loss for what your milestones should be, they should be aligned towards what growth/progress/metrics will enable you to raise your next round of funding (or to get to cashflow break-even, though that's farther in the future for many young companies). 

In terms of deciding on how much to raise, the preceding questions about length of time to achieve milestones then dictates your overall funding/runway. While a good rule of thumb is to raise for 18 months, your specific situation may vary. I often encourage startups to raise money to cover no less than 12 months. And the 18 month mark provides good coverage in case your growth is more conservative than expected. 

Another somewhat emotional factor that enters into the picture is how much of your company you are willing to give away at an early stage. It may be somewhat moot if you are raising on a note, but we have a post from late 2016 that delves into some of those issues.

When thinking about runway and the first fundraise, use the questions above to set a spectrum of expected capital needs. Doing so can greatly help in guiding the amount you should raise.