EC1 Capital

How long should a startup's runway be?

Getting the right balance
Jay Jay Tue 9th Sep 2014 16:37
SalopianJames

A startups runway is its lifeline; it tells you how much time a startup has before a startup runs out of cash, needs another boost of funding or becomes profitable.

Fred Wilson, a New York-based VC, looked at the data and concludes that “the amount of money startups raise in their seed and Series A rounds is inversely correlated with success.”

Tomasz Tunguz, another New York VC, settles upon quite a different conclusion: that larger seed rounds [and by extension longer average runway] correlate with higher follow on rates for Series A rounds because they enable startups to experiment, iterate and ultimately make for more attractive Series A investments.

Conclusions drawn from data should always be treated with a skeptical eye. The fact is that there is no one factor that determines the success (or demise) of a startup.

Nonetheless, runway matters. Raising too little or too much can be costly.

 

Raising too little

Fundraising is time-consuming.  If possible, founders should avoid a short runway.  Raising too little money may mean that founders spend more time trying to raise money than building and selling their product.  At the very least, founders should plan for 12 months of runway to be able to iterate and prove certain milestones (eg. number of users, revenues or paying customers).  Founders should also factor in the time it takes to raise another round (around 3 months). Frantically rushing around to raise more funds from existing and new investors is never fun.    

 

Raising too much

Raising too much money from investors may leave founders in an unfortunately position.  Although the longer runway minimises fundraising woes, it also means giving away more equity to investors.  Parting with too much equity early on in the game may leave founders' shares over diluted later on.

 Another risk of raising too much is the incentive to burn through too much cash.  Regardless of how much you raise, a startup should stay lean and keep the burn rate to a minimum. 

A startup’s life is fraught with uncertainties about the future. Raising more rather than less makes sense as it acts as an insurance against internal cash flow problems and unforeseen external shocks. It’s ultimately better to be safe than sorry.


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