Calculate Your Startup Funding Runway, a Walkthrough for App Founders

If you were tasked with designing an airport, you’d need to determine the ideal runway length so that planes could take off and land safely. Build a runway that’s too short, and it won’t be safe for planes to take off or land at your airport. Build a runway that’s too long, and you’ll increase the cost of your project without providing an additional benefit to your airport’s infrastructure.

How does this relate to app startups?

Every startup founder should be familiar with the concept of a funding runway. In simple terms, a funding runway is a measurement of how long a startup has before it runs out of cash. Generally, this is measured in months.

When startups raise money, they expand their funding runway. The concept of determining the right funding runway length for a startup can be viewed similarly for building an airport’s runway: without raising enough money, your app startup’s funding runway will be too small to create the product you envision. If you plan for too much runway, you run the risk of wasting equity.

How do you calculate a funding runway?

During each stage of developing your app, you’ll need to remain aware of your funding runway. To do this, you’ll also have to understand burn rate: the rate at which your startup is “burning” through its available funds. You need to account for both gross burn rate (your operating expenses) and net burn rate (the rate at which your startup is losing money).

Calculating gross burn rate

Suppose you start with a cash balance of $180,000. After a year, with no new cash influx, you have a remaining cash balance of $60,000. In this case, you’d have a gross burn rate of $10,000 per month. In other words, every month you’d be spending $10,000 on operating costs such as office space, servers, salaries, and other overhead.

Calculating net burn rate

Again, suppose you have a cash balance of $180,000 and spend $120,000 over 12 months. But suppose you have a cash influx to the tune of $30,000 over this period. In this case, your net burn rate would be $7,500 per month.

Calculating runway

Now let’s circle back to the funding runway, or the amount of time you have until your startup becomes insolvent. You can calculate the runway by taking your beginning cash balance and dividing it by your net burn rate. Using the same parameters mentioned above, your startup would have a runway of 24 months.

How much of a runway do you need?

An important question app startup founders must consider is how much runway is needed. Is 24 months sufficient? Generally, 12–18 months is considered a good default runway for most seed-stage startups. This gives your startup about 12–15 months to reach key milestones, such as launching your app, and another 3–6 months to raise your next round of funding.

However, some venture capitalists recommend preparing a longer runway — and there’s data to back up that argument. Business experts argue that entrepreneurs should plan for a runway of at least 18–21 months, and as much as 35 months, to play it safe. Why so long? Because building a successful product doesn’t happen overnight. It takes time for entrepreneurs to hire talent, raise funding, and ultimately develop and launch an app, and planning for too short of a runway between financing events might reduce your probability of success.

What happens if you have a high burn rate?

A high burn rate suggests that your cash supply is depleting at a fast rate. If you have a high burn rate, investors may set more aggressive deadlines for your app startup to realize revenue. It might also mean that investors would need to inject more cash into the company to earn that revenue.

If your runway is coming to an end, you’ll need to consider cutting unnecessary expenses and raising capital to remain viable.

Overall, the lower the burn rate of your startup, the better. Ideally, your startup will have a negative burn rate, which means you’re building cash reserves as opposed to using them up.

Why does this matter? Running out of cash is the second most common reason why startups fail. Neglecting to calculate an adequate runway for your startup could mean that your startup fails to meet cash obligations, such as processing payroll. If your runway is coming to an end, you’ll need to consider cutting unnecessary expenses and raising capital to remain viable.

How can you reduce your burn rate?

First, you need to understand how to calculate your burn rate and monitor it. You need to know when you expect to run out of money, break even, or earn a profit. Additionally, investors will want to know your burn rate. Here are some practical steps that can help your app startup reduce burn rate:

• Consider outsourcing or hiring an agency, relying on contract work when possible.
• Hire remote teams,  they may be more affordable and lower your overhead.
• Be flexible and willing to abandon ideas that aren’t working.
• Avoid big expenditures whenever possible.
• Review and manage your burn rate constantly.
• Don’t delegate tasks and responsibilities that you can handle yourself.

What are funding rounds for app startups?

Because each startup is unique, each financial situation will differ, which is why it’s vital to create a detailed financial plan prior to starting the app development process. If the initial process of founding your app startup goes well, the process of securing investments will generally follow a series of stages:

• Seed funding:  Startups often have trouble generating positive net income in the early stages of app development while their focus is on improving the product and building an initial user base. App-peneurs often rely on venture capitalists or angel investors to provide seed funding — early-stage capital intended to help finance the development of an MVP. As of 2016, the median amount of seed funding raised was $625,000. Altogether, 90 percent of startups don’t make it past this phase.
• Series A: Series A funding is generally used by app startups to optimize their product and user base as they scale. As of 2017, the median series A funding was $6.1 million.
• Series B: Series B funding is the stage at which investors help expand a startup’s market reach. Series B investment rounds are geared toward helping the startup bolster sales, business development, advertising, tech, support, and more. Series B funding typically ranges between $7 and $10 million.
• Series C:  A company earns Series C funding when investors put capital into successful, established businesses with the goal of getting back much more money than they put in. At this stage, tens of millions of dollars will be invested.

What are some pitfalls that startups might encounter?

For most startups, market dynamics will determine whether they can generate the capital needed to scale. If your app is built for a small or nonexistent market — in other words, if there’s insufficient demand for your product — you’ll struggle to get the investments you need to scale. Failing to manage cash flow properly or adapt to market changes can also sink a startup.

To avoid these common pitfalls:

• Conduct market research
• Ensure that your product solves a common pain point
• Research your competitors
• Take advantage of viral marketing tactics
• Have a clear, structured business plan that covers all elements of your app idea
• Prepare at least 2 to 3 years of financial projections and market size analysis
• Monitor and manage your core metrics: fixed vs variable costs, burn rate, cash balance, profit, and cash flow
• Consider crowdfunding your app

Conclusion

Startups have a lot to account for when developing an app. From researching and wireframing to testing, deploying, and maintaining an app, the process is complex. Understanding your funding runway is necessary to ensure your app startup has enough capital to develop a product while fulfilling business obligations. Additionally, investors want to see that entrepreneurs are aware of their own financial status and that they have a plan in place to grow their businesses. If you master the funding runway, your company has a better chance of remaining solvent, and you’ll know when it’s time to raise additional capital without wasting funds. By utilizing our tips, your funding runway will allow for a smooth takeoff.

Blog Contributor: Tom Greenhalgh | LinkedIn & Blog