For startups and scaleups, recommendations for ideal runway vary from around 12 months to 36 months. The ‘best’ solution will likely depend on the type of business and the risk appetite of the founders and team.
If your runway dips to six months or less, without the startup hitting its goals or expecting any funding, you will likely have to do some cost-cutting – fast.
On the other hand, a runway that’s too long, especially at the early stages, isn’t all good either.
A long runway could indicate your startup isn’t growing as quickly as it could be, or making the most of resources. That leaves you vulnerable to competitors and could become a concern for any future investors.
Some also argue that having a tighter runway (ie, one you can’t ignore) can make entrepreneurs more focused. Arguably, a little pressure could help you make the right decisions for your business; and help balance innovation and experimentation with sustainable business practices.
Imagine a hypothetical B2B SaaS startup, providing an AI-powered project management and collaboration tool targeted at small-to-medium creative agencies.
The business has $600,000 in cash in the bank, and is bringing in about $50,000 in sales income per month.
However, about $20,000 per month is paid out to vendors, and monthly payroll is $75,000.
This business would have a little over 12 months’ runway, before it completely runs out of cash.
However, the business’ income is increasing by 10%, month-on-month (with expenses remaining the same). Runway increases accordingly, reaching more than 28 months within six months.
Ultimately, the bank balance is still decreasing, but it’s happening much more slowly.
If the business makes some new hires or increases its marketing or software expenses, for example, that will also decrease runway.
The same business raises $500,000 in funding, instantly increasing its runway from 12 months to almost 25 months.
This cash injection allows the business to focus on research and development, or to expand into new markets. Or, it could focus on hiring or investing in new tools – activities that would boost revenue and short-term growth.
Tractor Ventures' non-dilutive loans are designed to help tech-enabled businesses make the investments that lead to short-term revenue growth.
They allow founders and decision-makers to increase runway without having to dilute ownership in the company, and without having to embark on lengthy equity fundraising activities.
Businesses that have revenue can get the cash in the bank to capitalise on momentum – potentially putting them in good stead to raise equity funding later, at a better valuation.
Contact our team if you think non-dilutive funding could be the best way to extend your business’ runway.
Find out more about Tractor's non-dilutive lending solutions.
Take a look at our Tractor Business Loan Calculator.
Weigh up your options with our Cost of Capital Calculator.
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