Knowing how to extend your start-up’s runway could be the difference between your business taking off or floundering. But before you take action, it’s crucial to understand how much runway you have left and how much you still need. Your start-up’s runway is the amount of time your business has before it starts running out of money. Ideally, every start-up should have enough runway to build up enough momentum to succeed.
Calculating your runway
So what’s the easiest way to work out how much runway you have and how much you require? Choose and use your start-ups income and expense data over a recent interval. Ideally, this time period should be as long as possible. But figures from one – three months will do if that’s all you have. Your start-up’s runway is your current cash balance divided by your net burn rate. You calculate your net burn rate by taking your cash balance at the start of the time period, subtracting your cash balance at the end of the time period, and dividing that figure by the number of months. Next, divide your current cash balance by your net burn rate and voilà, you have your runway. The optimal amount varies depending on the stage of your start-up, but as a general rule, you should aim to have around 18 months of runway.
Extending your runway
1. Cut your costs
Cost-cutting is our first runway-extending hack because it’s likely to give you a quick win. Start by taking a long, hard look at your expenses. Trim back any unnecessary costs like entertainment, catering, software platforms or devices. Next, look at your essential expenses. Could you replace your software subscriptions with lower-cost or free versions? What about switching to discounted phone plans or low-cost office accommodation, such as a co-working hub? Instituting a hiring freeze should also be on your cost-cutting to-do list. Payroll is a substantial cost for any organisation — big or small — and start-ups are no exception. Although new hires can grow your revenue, you have to find the right people and onboard them. It will take time before your new recruits start kicking goals. So if your runway is looking short and shaky, pausing your recruitment plans is probably a smart move.
2. Diversify your offering
Most start-ups spring from an innovative concept that forms the basis of their flagship product or service. While having a novel offering can give your start-up the edge, particularly in the early days, it can easily become a double-edged sword. If the COVID-19 pandemic has taught us anything, it is that circumstances can change in the blink of an eye. So try to avoid putting all your eggs in one basket when it comes to your products or services. You could develop other offerings, but this might be time-consuming and costly. Think about how you can adapt your existing products or services so they appeal to new markets or customers instead. That way, if growth in one sector flatlines or disappears entirely, your business won’t be on the fast track to insolvency.
3. Seek alternative finance
Start-ups and small and medium-sized enterprises (SMEs) have a tough time accessing bank loans and other traditional finance. Fortunately, now fintechs are bridging the funding gap. Judo Bank and Tyro are two Australian fintechs that are challenging established banks for a share of the SME market. But even if your business receives a loan from a neo bank, you still need to pay it back. And if your growth plans falter, your repayments could become a struggle. If your business conducts R&D, you could be eligible for R&D finance, such as a Radium Advance. A Radium Advance is a business loan too. But it’s secured against your company’s pending R&D tax refund, which means you don’t need to sweat the repayments because your R&D refund will more than cover your loan costs. There’s nothing to pay until your tax refund arrives, so your advance is cash flow friendly too.
4. Increase your revenue
If your start-up has products or services and customers, you could raise your revenue to increase your runway. But you’ll need to do this carefully to avoid unwanted consequences. Many founders find themselves balking at the idea of asking customers to pay more. If that’s the case for you, consider whether increasing your rates for new customers could offer a neat solution to help lengthen your runway. However, this will only work if your business has high volumes of new customers. It’s more likely that most of your revenue flows from your existing customers. If that’s the case, make sure you calculate the impacts of different pricing scenarios on your business. If you raise your rates by too little, you will need to increase your prices again in a month or so. But if you make your prices too high, then you could end up losing customers and being worse off. Look beyond the linear relationship between pricing and customers. Analyse why, when and how existing customers leave and devise strategies to retain them. Consider which type of customers generate the most revenue for your company and increase your marketing efforts to target them. Think of ways to increase the revenue from your existing customers, for example, offering value-add or additional services. Take an honest look at your business model and pricing strategy. If these are delivering a stop-start revenue stream, prioritise solving this issue because having consistent capital is crucial, especially when you’re trying to get your start-up off the ground.
5. Raise capital
Raising capital is probably the first option that comes to mind for start-up founders seeking to extend their runway. But less than 1% of start-ups successfully obtain this type of capital, making it a moon shot for most. The funding round process is rather time-consuming too. So it’s not your best bet if you’re either short on capital or the resources required for researching and pitching to Angel Investors or Venture Capitalists. Having said that, a capital raise is still a crucial funding source for start-ups. So if you do have the time and resources, and are comfortable with giving a share of your business to an investor, then it’s an excellent way to extend your runway. Start by considering whether Angel Investment or Venture Capital is better for your business. You can read our blog article to help you answer this important question. Then do your homework and develop a shortlist of potential investors that could be a good match for your start-up.
Bringing it together
There are several ways to extend your runway, and taking an approach that combines a few of these will probably give you the best result. If your business has an R&D program, we recommend exploring your eligibility for the Federal Government’s R&D tax incentive (R&DTI). Read our blog on which research qualifies for the R&DTI and how to apply. If your business qualifies, you will also be eligible to apply for a Radium Advance. We can process your application within two business days and have your funds in your bank account shortly after you sign your loan agreement. To find out more, call us on 1800 723 486 or book an appointment with one of our R&D finance experts today.