A key business performance metric for startups to track is the months of available cash in the bank. Whether that cash has come out of the pockets of the founders, borrowings or seed funding doesn’t really matter, a key metric for your regular financial report is how the company is using this money and when the money might run out.
These two figures are a company’s Burn Rate and their Runway. Burn Rate is the running operational loss a business incurs during a reporting period. Runway is the projected amount of time that they company’s cash will be needed to cover its expectations for its Burn Rate.
Often the reason many startups fail is not because they had a failed business idea, or even an unsustainable business model, it’s simply because they ran out of money before they were able to achieve profitability. Simply put they run out of Runway. Which is a real shame if the end was in sight, but just not attainable with the resources on hand.
Armed with this financial knowledge about the company, Founders who are trying to attract investment, have a better handle on what they are looking for and how strong their position is.
It presents a much stronger picture to investors if a founder is able to say: I’m looking for $500K of investment capital in order to gain 1.5 years of runway. Then to say I’m looking for $500K to cover our increases and salaries, development costs and cost of sales.
Sure they probably amount to the same thing because that is how the money will be used and you’re likely to have to provide these details at some point. It’s just the first statement provides a better executive view of how you see the big picture forming. It then leads nicely into other powerful questions such as: where do you see the company in those 1.5 years? Do you see it on the road to profitability? Or will you likely be still burning cash? Do you have a good idea of how increases and revenues and changes in the cost of acquiring new customers will impact the Burn Rate? Are you looking for the cash to initially increase your short term Burn Rate, with the expectation that it will increase your customer revenues and then actually bring profitability closer?
It also shows investors that you have a good handle on what investment money should really be used for. That you recognize it is a scarce resource that needs to be used to get the company over the initial hurdles to profitability. Not just for cool office space and celebration nights out. (Though, these can be important spends within reason.) And though it is called a Burn Rate, you are showing that you have an idea of how not to burn right through it, but to make it last.
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