When it comes to start-up runways and whether to extend them, founders need to know when to hold and when to fold. With that in mind, we’re exploring what a start-up runway is, how to calculate how much runway you have, and how much you need to get your innovation off the ground. We’re also weighing up the thorny topic of whether extending your start-up’s runway is the best course of action at all.
What are start-up runways?
Before we answer the vexed questions of when and indeed whether you should extend your start-up’s runway, let’s consider what your runway is. To cut a long story short, a start-up’s runway is how long the business has before it runs out of money. Knowing how to calculate your runway is essential for every founder. Fortunately, it’s quick and easy. You take your start-up’s cash balance and divide it by your start-up’s net burn rate to arrive at your cash runway.
For the low down on this equation plus a host of other crucial sums for start-ups, see our article, Nine essential calculations for start-ups to succeed.
When to extend your start-up’s runway
How much runway you need to get your business off the ground can vary. It depends on a range of factors within and beyond your control. These include the product or service you’re developing, the characteristics of your team and the ecosystem you have in place to support your start-up. That said, most experts agree that start-ups should aim to have 18 months of runway. You may need to extend your runway if unforeseen circumstances arise, for example supply chain issues, or a seismic socio-economic shock such as a pandemic or a war. Equally, you may discover that you need additional R&D and therefore have underestimated the length of runway you need.
Extending your runway sustainably
When considering whether to extend your start-up’s runway, it’s crucial to keep in mind that this will likely mean either taking on more debt or giving up more equity. So, chances are it will involve a cost to you and your business. However, taking a hit to your current or future hit pocket is by no means a foregone conclusion. It all comes down to your start-up’s circumstances.
1. Reduce your overheads
If a start-up’s runway is disappearing fast, cutting your costs is a great option that’s speedy to implement. Even if you’re not in a pinch, decreasing your outgoings is a quick and simple way to lengthen your runway. Start by cutting back on non-essential costs, such as entertainment, travel and subscriptions you either don’t use or need. Then move on to your essential costs and consider whether you can find cheaper substitutes. For example, you could consider switching to cheaper phone and broadband plans, moving out of leased premises and into a coworking space or instituting a hiring freeze and using contractors or casual workers instead. With cost cutting, the main pitfall to avoid is going too far and slowing your speed to market which will negate any gains to your runway length.
2. Ramp up your revenue
If you already have customers or your start-up could begin to attract customers, step on the gas and prioritise capitalising on this opportunity to get money through the door. Of course, generating revenue isn’t an option for all start-ups, especially if their products or services are still in development or require long-term investment. However, start-ups can and do get creative with some early-stage ventures running side hustles, e.g., consultancy services. Revenue from these ancillary activities serves to stabilise their cash position and cross-subsidise the R&D and product/service builds.
3. Alternative finance
We don’t need to school start-ups on how difficult and expensive it is for them to access traditional finance from banks. Most founders and entrepreneurs are all too familiar with this predicament. That’s where alternative finance comes in. Offerings in the space — including the R&D financing we offer at Radium Capital — have grown so much in popularity that they are a ‘mainstream finance’ option for many businesses with innovation. In addition to its wider availability, alternative finance for start-ups is often less expensive with faster and more streamlined approval processes than its traditional counterparts. Indeed, Radium Advances, the R&D financing product from Radium Capital, is cash-flow friendly too, with no minimum term and no repayments until your loan matures. And, businesses with a Radium Advance have the added certainty of knowing their R&D Tax Incentive refund will repay their loans (and then some) when it arrives.
For more information about alternative finance options, check out our article, Innovation funding trends founders need to know about.
4. Traditional debt and equity funding
When start-ups begin to explore equity or traditional debt finance, they must ensure the funding source is both achievable and sustainable. Both can be fraught with uncertainty and plagued by delays. Even late-stage start-ups and scale-ups can find it challenging to have their loan applications approved by traditional lenders. And, only a small percentage of start-ups that seek investor funding, for example, from Venture Capitalists are successful. It can take months to thrash out a deal, especially in today’s uncertain times. Even if your start-up does secure a loan or attract an investor, founders need to stay vigilant about its sustainability, so the company avoids becoming too highly geared or too diluted.
For more ideas and information about extending your start-up runway sustainably, read our articles, How to slow your burn rate and extend your runway and Five ideas to help you extend your start-up’s runway.
To extend or not to extend?
In start-up circles, the focus on start-up runways tends to be about extending them. The trope is that founders must always burn the midnight oil, play for time, hustle and, if required, cut deals at the 11th hour to stay afloat. But the reality is, founders must channel the wisdom of Kenny Rogers – The Gambler and know when to ‘hold ‘em or fold ‘em’. Most founders will face the question of whether they should extend their start-up’s runway. So how do they know when to ‘hold’ on to their business, or ‘fold’ and ultimately walk away from the venture and vision they’ve worked so hard to build?
We suggest you read our article, Seven successful start-up exit strategies for founders which explores in detail how, when and why founders leave their start-ups. In there, we’ve summarised both the most and least likely reasons why founders exit because they either can’t or don’t want to extend their start-ups runways.
Get advice and consider your options
Before you make any decisions, try to be realistic about its prospects of your start-up getting off the ground and becoming revenue-generating and profitable. Consider seeking external advice or talk to someone you trust to give you an honest opinion about your start-up. Founders can contemplate calling time on their start-ups for a whole range of reasons. External forces outside of their control could force them to close their doors. But the main reason is often a lack of funding to continue trading. This situation means the business could become insolvent and its founder could be facing bankruptcy. If this is the case your best option is to liquidate the business.
In very rare circumstances, your business may be on the brink of failure but have an all-star team. If that’s the case, you could shoot for an acquihire. This involves selling to another company that will close your business but snap up your staff.
Moving on to pastures new
Although business failure is often why start-ups don’t extend their runways, it’s not always the case. It could be the company’s R&D has delivered surprising results leading the founder to shutter the original start-up and create a new venture with a different mission and innovation focus. Equally, you may realise that although you are the founder, your heart is no longer in it. If the start-up has potential and you have an equity partner, management team,or an investor willing to continue the business, you could decide to sell your stake in the venture. That way, you can hand over the baton and leave other stakeholders to drive the business upwards and onwards and embark on an exciting new chapter yourself.