A few weeks ago in the Hustle Fund’s team Slack channel, a group of us dove deep into the topic of runway.
I learned a ton during this conversation, so wanted to share some of those learnings with the Small Bets community.
Specifically, this week we’re covering:
- Why runway is an important metric
- How (and when) to help your portfolio companies when runway is low
- Why doing nothing is often the best option
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But first, what’s runway?
Runway is the amount of time a startup has before it runs out of money.
Generally calculated in terms of months, runway consists of money in the bank divided by monthly burn.
For example, if a business has $100k in the bank, and their monthly expenses are $10k, that business has 10 months of runway.
Now, most early stage startups don’t have much money in the bank, so their runway is around 1-2 months.
As investors, this shouldn’t freak us out. As long as the business is keeping costs low and staying focused on bringing revenue in, its runway should increase over time.
But if that’s the case, why is runway an important metric to ask about?
Why runway is important
Investors ask about runway for 2 reasons:
- To understand which portfolio companies need help urgently
- To get a sense of how your founders think about cash flow
Let’s start with number 1.
Knowing which companies need help.
When startups are close to running out of money, you as the investor have two options: try to help them find a soft landing (acquisition or acqui-hire), or do nothing.
Helping the company with their soft landing might feel instinctual. After all, you don’t want to just let your investment go bankrupt.
But sometimes doing nothing is the best option.
This is because startups – even when they have very little cash on-hand – often turn it around at the last minute. They land the big client, they offload a bunch of expenses, or they finally collect on an outstanding invoice.
So if you come in to give them an “out” too soon, you may actually be thwarting their efforts to breathe life into the business.
The question is… how do we know when to jump in versus just leaving them be?
Spoiler alert: there is no hard and fast rule. But this is where #2 comes in.
Finding out how your founders think about cash flow
Obviously, as investors we prefer to have as much info about our portcos as possible.
But just asking your founders about their runway is beneficial, because it makes them seriously think about their cash flow.
You see, many founders don’t do a good job tracking their cash flow.
Maybe they’re overwhelmed with the responsibilities of running the business, or maybe they just aren’t detail-oriented.
Either way, asking about their runway will give you an understanding of whether or not the founder is aware of how much money is coming in every day.
How to help your founders
If you want to ask your portcos about their runway, here are specific questions you can use:
- Are you as a founder comfortable with the amount of runway you have?
- If not, what would you like to do to address this? Bring in more revenue? Lower costs? Fundraise more money? Explore a sale?
Based on their responses, you can help them think through their cost plan, invest more money into the biz, introduce them to other investors, or help with an acquisition.