When you invest in a company, you’re basically giving that company the capital it needs to keep going.
During the early stages of growth, the vast majority of startups are “cash negative;” even those that pull in revenue are likely spending a great deal more on development, marketing, and so on.
Each infusion of cash a startup receives contributes to its runway – or the amount of time it can continue to cover expenses while it grows larger. As the startup burns through its funds, the runway gets smaller. And, when the money begins to run out, founders make plans for their next raise.
Although it sounds fairly trivial, the amount of time between raises is critically important.
Here’s why: organizing each raise is time-consuming and strenuous.
In some cases, it may take founders several months to file all the required paperwork to take on investors. Then come pitch meetings, negotiations, and pestering people to write checks.
This whole process can take a really long time. I’ve heard of startup founders spending close to six months on each raise they run.
So it makes perfect sense to extend that runway as far as possible. If each raise only provides a startup with six months of runway, there’s not much time for the founders to focus on growth before the next raise needs to happen.
Raises are distracting for founders. They take precious time and attention away from the fledgling business – and the best founders need to be able to spend 110 percent of their time in the game (more on that here).
Generally speaking, I like it when startups raise at least 18 months’ worth of runway at a time. That’s long enough for the founders to spend a year or more with their noses to the grindstone… but still short enough to give investors regular opportunities to revisit the company’s progress.
The important thing is that founders stay unflinchingly focused on their mission – to grow their companies and return a healthy profit to their investors.
Until next time,
5 responses to “How Much Runway Does a Startup Need to Take Off?”
May 28 2019