Runway. To founders, this ominous word can summon up images of both success and failure. With sufficient runway, your startup can sail along smoothly, with little turbulence to disturb it as it reaches milestone after milestone. With insufficient runway, however, your startup faces major issues. In fact, insufficient runway can crash your startup.
Founders often face the issue of insufficient runway. The funds they raised in their last round are running out, but their product isn’t ready to launch. In this situation, it may be too late to find an impactful solution as the primary directive is raising more capital to survive. But before we jump ahead to avoiding this predicament, let’s discuss what runway is, its significance for an early-stage startup, and how an insourced product development team can be a way to avoid ever being in this situation.
What is Runway?
Runway is the amount of time your startup has until it runs out of cash. Founders can use a simple formula to calculate how much runway their startup has: Cash balance ÷ monthly net burn rate = runway.
Arriving at the correct runway calculation is crucial. If your runway is too short, you’ll run out of cash before you reach certain milestones. If your runway is too long, you can end up paying for it dearly with diluted equity. Both scenarios can prove disastrous to founders.
Therefore, it’s important to use correct data in your equation to arrive at the correct answer.
Why Monthly Net Burn Rate is Important
The monthly net burn rate is an important part of your runway equation. The net burn rate (as opposed to the gross burn rate) measures how much revenue your startup generates and how much it spends.
For example, your company might generate $100,000 a month — but that fact alone doesn’t tell you much. To see the whole picture, you have to know how much money the company spends to generate $100K.
The basic formula to determine your monthly net burn rate is:
(Monthly revenue – cost of goods sold) – Gross burn rate = Net burn rate
Profitable companies have a negative net burn rate since they generate more revenue than they spend.
Routes Toward Extending Your Runway
Early-stage B2B SaaS startups should seek a runway of about 18 months. If your runway is less than that, it’s time to start thinking about how to extend it.
Since there are two parts to the runway equation (cash value and monthly net burn rate), there are two main ways to influence your runway:
- Increase your cash value
- Reduce your monthly net burn rate
Venture debt is a good option for increasing your cash balance without further diluting equity. Founders with companies that are generating revenue, but find themselves with a shortening runway can use venture debt to extend their runway while ramping up marketing and sales, ultimately leading to sustainable growth.
The downside of venture debt, of course, is that you have to take on debt. That’s why reducing your net burn rate is a better option.
How An Insourced Product Team Can Extend Runway
An insourced product development team reduces development costs at critical stages of your startup, which results in a reduced monthly burn rate.
Of course, there is a catch to outsourcing your product dev — you have to do it right. You want to choose a team that has validated experience, understands the importance of good communication, and that can deliver high-quality results.
80% of the investment deals we’ve seen at Golden Section have intractable tech problems, which end up costing an arm and leg to fix — so goodbye runway. That’s why we believe in building right the first time. To do that, having a product team that knows what it’s doing is critical.
Because we feel so strongly about this, we offer our product resources to our portfolio companies. Our team has years of experience in the startup and VC worlds, and we know how to build a product right, from start to finish. Moreover, we’re not trying to replace in-house, we want to enable revenue growth to support your product development, so founders don’t need to pay full-time salaries plus benefits before acquiring a single paying customer. They can reduce their burn, extend their runway, and end up with a software product of the highest quality.
We’ve done this over 400 times, and are excited to continue building products the right way for founders who understand how important this is!