Startup runway is a key metric that can help founders manage spending until their next infusion of capital. It's an important measurement to understand since running out of money is the most commonly cited reason that venture-backed startups fail.

To calculate your business's cash runway, you often need to determine your monthly burn rate first and outline all expenses carefully. Below, we'll discuss in more detail what startup runway entails, how exactly to calculate it, and how it connects to your fundraising timeline.

Key takeaways

• Startup runway measures the amount of time a business can continue operating at its current spending rate before it runs out of cash. This metric is key, as running out of capital is one of the most common reasons venture-backed startups fail.

• Knowing your startup runway can help inform your budget and decision-making around fundraising. If you know you have enough cash in reserve, you can avoid making panic-driven decisions, such as giving away too much equity, in order to stay afloat.

• You can calculate startup runway by dividing your current cash balance by your net monthly burn rate (NMBR). But you'll need to know your monthly burn rate first. That requires a separate calculation to confirm how much your business spends each month, on average, after accounting for positive cash flow.

What is a startup runway?

Startup runway is the amount of time a startup can continue operating at its current spending rate before it runs out of capital. It's a core data point for founders because it can provide a realistic idea of how long the business can manage financially. A cash runway of 24 – 36 months is a common benchmark.

Investors also typically track this number closely since a longer runway can suggest that a startup has a viable business model and might be worth investing in. Generally, startups with a cash runway less than six months have a harder time securing investor funding.

Why does startup runway matter to startup founders?

Startup runway is important for founders to track. Here are some ways it can help your company:

• It can give you more options: If you expect your cash reserves to last a while, that can take financial pressure off your business (and you personally). It could allow you to turn down a subpar investment offer and hold out for something better. In practice, this might mean saying no to a deal that would require you to sacrifice a large percentage of equity. But if you have a short runway, you might have fewer options.
  
• It can inform your spending: You might estimate how expanding your team or cutting back on your marketing spend could impact your runway. For example, if you have 12 months of runway, hiring new employees could significantly shorten it.
  
• It can determine when you start your next funding round: Your startup runway gives you a timeline. You can work backwards from there and start planning for fundraising well before you run out of cash.
  

How does your runway connect to your fundraising timing?

How much runway you have when you begin the fundraising process can affect your negotiations with investors. One common practice is to start before your runway drops below six months. To be safe, you might want a runway of at least 12 months. Starting early can help your startup avoid a cash flow issue that could weaken your negotiating position. Investors will likely be more inclined to work with you when you have a healthy amount of operating funds in your bank account. This could tip negotiations in your favour, allowing you to take your time and wait for the right investor offer.

Where your business is in the startup cycle could also affect your fundraising timeline. At some stages, six months of runway might be too little. That amount could work for early-stage startups. They generally receive smaller funding amounts so funding rounds tend to move faster. However, if your business is going from seed funding to Series A funding, some experts suggest starting when you have 12 – 15 months of remaining runway.

What is the startup runway formula?

The cash runway calculation is fairly straightforward, but you'll need to prepare these key figures beforehand:

• Current cash balance: The total cash the business currently has available, including any assets that could be converted to cash relatively quickly

• Total monthly expenses: Regular operating expenses, including insurance and taxes

• Total monthly revenue: Income from all business sources

Once you have those numbers, you'll first want to calculate your net monthly burn rate (NMBR). This is the average amount of money your business spends on a monthly basis after accounting for positive cash flow (e.g., business income, grants).

Here's the formula:

Monthly Expenses - Monthly Revenue = NMBR

You can then calculate your startup runway using this formula:

Cash Balance ÷ NMBR = Startup Runway

Example calculation

Here's a simple example of a startup runway calculation for a business that has US$800,000 in cash reserves, US$90,000 in monthly expenses, and US$35,000 in monthly revenue.

To find the NMBR, the maths would look like:

Monthly Expenses - Monthly Revenue = NMBR

US$90,000 - US$35,000 = US$55,000

Then, using the startup runway formula, it would be:

Cash Balance ÷ NMBR = Startup Runway

US$800,000 ÷ US$55,000 = 14.5 Months

Using just these variables, the startup's runway is about 14.5 months. But it's important to remember that the basic calculation doesn't factor in seasonal expenses or one-time costs. This business might pay an annual insurance premium of US$12,000, which can be split into another monthly cost of US$1,000 (i.e., US$12,000 ÷ 12 Months in a Year = US$1,000 Per Month).

It could also experience revenue slowdown in the summer so its monthly revenue drops to US$17,500 for three months. That's US$17,500 in lost revenue for each of those summer months, which can be extrapolated to US$4,375 each month over a year:

(US$17,500 × 3 Summer Months) ÷ 12 Months in a Year = US$4,375 Per Month

Here's how those additional costs can increase the NMBR:

Old NMBR + Monthly Insurance Premium + Seasonal Revenue Dip = New NMBR

US$55,000 + US$1,000 + US$4,375 = US$60,375

And here's how that new NMBR can decrease startup runway:

Cash Balance ÷ New NMBR = New Startup Runway

US$800,000 ÷ US$60,375 = 13.25 Months

A more holistic view of the startup's expenses made its runway 1.25 months shorter.

What are some common mistakes when calculating startup runway?

When you calculate your startup runway, it's helpful to think in terms of months since fundraising benchmarks typically use months. Many of your startup's business expenses, such as rent, might also be due on a monthly basis. However, this isn't always the case. You'll want to account for expenses that are due on different cadences and at different times throughout the year. These might include insurance premiums, tax payments, and software subscription renewals.

It's worth including any upcoming one-off expenses (e.g., equipment, an office move, new hires) as well. Seasonal changes in revenue might also be part of your business cycle. Using higher cost estimates can help you calculate a more conservative runway that's aligned with your broader fundraising goals.

How can startup runway be extended or improved?

If your startup runway feels too short, there are some options that can help extend or improve your runway. For example, you might consider:

• Reducing discretionary spending (without going so lean that it hurts your operations)

• Renegotiating vendor or lease terms

• Delaying nonessential hires

• Increasing revenue, if possible

• Looking into small business grants

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