How to extend your cash runway | Runway by Raising Partners

As a startup founder, you may be under pressure from investors to reduce your burn and increase your cash flow to extend your runway. However, achieving this can be challenging. You may find it difficult to cut your burn rate without sacrificing business growth or increasing your cash balance without handing over shares of your business, raising a down round, or risking the loss of personal assets.

Additionally, you may need to get cash quickly without increasing costs that should be cut or finding a business model to help you increase your runway. To help you with this, in this post, we will cover four fundamental ways to extend your runway as a startup, tips on calculating how much runway you need and your burn rate, mistakes to avoid when extending your cash runway.

Reduce Costs

As fellow entrepreneurs, we understand the importance of evaluating your cash runway, capital analysis, and searching for ways to extend it.

Some of the most common ways to achieve this include:

Headcount: Review the cost of each department and compare it to its return on investment (ROI). Determine if you truly require the current number of staff in each division. Could the department operate efficiently with fewer employees?
Subscriptions & Recurring monthly costs: Regularly assessing where you are spending money each month can reveal some surprising savings. In our experience, our average portfolio company has been able to save almost £3,000 per month just by scrutinising each software subscription, checking they aren’t overpaying for users and doing price comparisons to get a better deal.
Marketing spending: Consider reducing the number of agencies you’re outsourcing your marketing efforts to, or establish an in-house team.
Customer acquisition costs (CAC): Scale back spending large amounts of money on advertisements.

Advantages of cutting costs:

By cutting costs, you have complete control over how you allocate your cash, giving you greater flexibility. This is the simplest way to extend your runway as you have no obligation to anyone else.

Disadvantages:

Reducing headcount is the most common approach to cost-cutting, but it is also the most challenging and may not always be the most effective. Because this decision impacts people’s lives and their families, cutting employees is more personal. That’s why it may be preferable to cut back on SaaS tools, marketing, expense budgets, and CAC before resorting to letting go of employees.

Another downside is that miscalculations can occur. If you misjudge your burn rate, you might end up eliminating essential aspects that hinder business growth. For example, reducing your customer acquisition costs (CAC) may appear to be a good idea at first, but it could result in the loss of all new customer leads.

You can only identify the areas to eliminate to reduce your burn rate when you use the appropriate metrics (which we will discuss below).

Focus on more profitable revenue streams

Extending your startup runway through generating quality revenue is the most challenging approach of the four. If you’ve been relying on any and all customers, it’s time to shift your focus to profitable deals and avoid unprofitable ones.

One way to do this is by lowering your customer acquisition cost (CAC) while creating high-margin revenue.

For example, instead of offering free tier subscriptions alongside paid higher tiers, a SaaS company may opt for free trials that convert to paid subscriptions for all tiers. The CAC budget can then be allocated to attracting higher-tier clients.

Pros of generating quality revenue include keeping control of your company without relying on external funding and avoiding the risk of losing personal assets.

However, there are also cons. One risk is churn, which can be avoided by incentivising customers to switch to yearly contracts and shifting resources from marketing and sales to account management.

Another risk is slow results. When working towards generating higher quality revenue, ensure that you have enough runway and a sound plan for profitability. It may take months to identify the right channels, market them effectively, and see results. If you don’t already have a profitable channel, it may take time to develop one or tweak your existing product or service.

Raise investment

Extending your startup runway through raising capital is possible by either raising money from new or existing investors.

During good economic times, raising funds externally is feasible, but during a downturn, it may be difficult to do so without compromising your company’s valuation. Alternatively, raising capital internally with your current portfolio of investors, regardless of the economy, could be an option. When raising capital internally, investors may be willing to offer another round of funding at the same price, at a discounted rate, or a lower valuation to preserve their initial investment.

To raise capital internally, you can talk to your VCs and angel investors about another round of funding. You could agree to flat rounds or simple agreement for future equity (SAFE) rounds (receive cash now in exchange for stakes in future equity) to raise capital while preserving your valuation and flexibility.

Pros of raising more capital include the possibility to stay afloat, grow your business, and receive mentorship from investors who want to see you succeed.

Cons include giving away more dilution, having less control over your company, and less flexibility to use the money as you’d like. Raising funds could also take the longest amount of time out of the four strategies, possibly taking months or years.

Raise Debt Finance

If obtaining equity or raising funds proves to be a challenge, taking on debt could be an alternative way to capitalise your business and extend your runway.

By leveraging your balance sheet, revenue, and customer base, you can secure additional capital for business growth without touching your cash reserves.

If you are a revenue-generating business, you could also investigate leveraging a revenue-finance provider such as Outfund.

Pros of raising debt:

Debt allows you to invest in new products, features, or services while keeping your cash reserves intact. Unlike equity, debt doesn’t dilute your business and offers more flexibility in how you use the funds.

Cons:

Obtaining debt financing can be time-consuming, although it’s typically faster than raising capital through other means. For instance, securing a bank loan can take several months.

Lenders may require personal guarantees, covenants, or warrants, which puts your personal assets at risk.

Additionally, taking on debt means incurring additional costs, such as interest rates. If you need to deploy funds in multiple currencies, you may also face additional charges, including transaction fees, currency hedging costs, and foreign exchange fees.

How much runway should you have?

To ensure your startup’s success, it’s important to have a sufficient runway length to reach milestones. In a favourable market, aim for 24 months of runway (plus or minus six months). It’s essential to carefully budget and monitor your cash balance and net burn rate to avoid running out of funds. Once your runway reaches 8 to 10 months, start raising more capital. It’s not uncommon for early-stage, high-growth businesses to always be in a fundraising cycle.

If you anticipate an economic downturn, plan to survive for 24 to 36 months. Fundraising and managing a startup during a recession can be challenging, so it’s crucial to prepare accordingly.

How do you calculate burn rate?

To calculate your general burn rate, divide your total cash balance by your monthly operating expenses. Additionally, consider your burn multiple, which is the quality of revenue generated based on the amount of money burned.

It’s also essential to consider whether your business is default dead or default alive. To become default alive, you need a path to profitability or a positive operating income before your cash runs out. If you have a £1,000,000 cash balance and a monthly cash burn of £100,000, you’ll be default dead in 10 months. However, if you can achieve profitability within 24 months, you can become default alive.

Mistakes to avoid when cutting costs

Timing is crucial when it comes to fundraising and managing your cash runway. If you wait too long to raise money, you risk running out of cash before you can secure funding. On the other hand, if you act too quickly and cut costs prematurely, you may hurt your business’s growth potential in the long run.

To strike the right balance, it’s important to monitor your runway frequently and start fundraising when you have around 10 months of cash left. This gives you enough time to secure funding without waiting until the last minute.

Similarly, before making any cost-cutting decisions, evaluate the impact on your business’s growth potential and team morale. Firing the wrong people or sacrificing too much growth can lead to long-term setbacks that may be difficult to recover from.