Startup Runway: Why burn rate and cash runway are important for startups
As a startup founder, you face new challenges every day. Processes are implemented step by step, structures are continuously adapted, and the business model has yet to prove itself. Does the idea hold up against the competition? Is there sufficient demand for the product or service? And above all: how long will your cash reserves last? This last point is particularly critical, as a lack of funds is one of the most common reasons startups fail. That is why it is vital for startups to keep an eye on their finances from the very beginning and know how long their cash will last. Burn rate and cash runway are essential metrics that every startup should know. We explain how to calculate both and provide tips on how to optimize your runway length.
Startup Runway: A definition
A startup runway, also known as cash runway, is a financial metric that indicates how long a startup can survive using its existing cash reserves before it needs to raise more capital.
This period, often measured in months, is determined by the company's current expenses and, if applicable, its revenue. The runway helps founders and investors understand how much time a startup has to reach key milestones or secure the next funding round before it runs out of money.
The term "runway" refers to the distance an aircraft needs to take off. A longer runway gives a startup more time to achieve growth, develop products, and establish itself in the market before needing to raise additional capital. It is an essential metric that plays a central role in a startup's financial planning and strategic decision-making.
What is the burn rate?
The goal of every startup is to develop a sustainably profitable business model and achieve positive cash flow as quickly as possible. However, this can take years. In the early stages, startups often experience negative cash flows due to high costs and low revenue. Therefore, it is important to have sufficient financial resources to cover initial expenses and investments.
The burn rate is a key liquidity metric for startups. It shows how long a company can survive with its financial resources given a constant negative cash flow without additional capital inflows. The burn rate, also known as the cash burn rate, is usually expressed as a monthly or annual expense. It is a snapshot that can change due to fluctuations in cash flow or increases in equity.
If companies burn through their cash too quickly, i.e., they have a high burn rate, there is a risk that they will run out of money and the company will cease to exist. Conversely, a low burn rate can also mean that a startup is not investing enough in its venture to build a successful long-term business.
Gross burn rate vs. net burn rate – what is the difference?
When discussing burn rate, a distinction is made between gross burn rate and net burn rate.
- Gross burn rate: The gross burn rate is the total amount of cash a company spends each month. It includes salaries, rent, and other operating costs, as well as interest and taxes.
- Net burn rate: The net burn rate is the amount a company loses per month, which is the difference between revenue and expenses. Unlike the gross burn rate, the net burn rate takes into account cash inflows common to startups, such as investor funding, sales, and loans. A positive net burn rate means the company spent more than it earned during the month. A negative net burn rate, on the other hand, indicates that more was earned than spent.
Calculating gross burn rate
(Initial cash balance − remaining cash balance) / 12 months = monthly gross burn rate
If a hypothetical company XY has 270,000 euros in its account at the beginning of the year and 30,000 euros left at the end of the year, the company has a gross burn rate of 20,000 euros per month.
(€270,000 − €30,000) / 12 months = €20,000 monthly gross burn rate
Calculating net burn rate
(Gross burn rate – cash inflow) = net burn rate
Wenn auf dem Konto des Unternehmens XY zu Jahresbeginn 270.000 Euro sind, während des Jahres 60.000 Euro an Cash auf das Konto eingehen und am Ende des Jahres noch 30.000 Euro auf diesem übrig sind, hat das Unternehmen eine Net Burn Rate von 15.000 Euro pro Monat.
(€270,000 − €30,000) / 12 months = €20,000 monthly gross burn rate
60.000 € Cash-Zufluss / 12 Monate = 5.000 € Cash-Zufluss pro Monat
20.000 € Gross Burn Rate − 5.000 € Cash-Zufluss = 15.000 € monatliche Net Burn Rate
Cash Runway berechnen – so geht's
Der Runway eines Unternehmens gibt an, wie viele Monate oder Jahre ein Unternehmen bei gleichbleibenden Ausgaben und Einnahmen überleben kann. Es gibt zwei Hauptarten des Runways: den Runway Gross und den Runway Net.
Der Runway Gross bezieht sich auf die Gross Burn Rate und bezieht nur die Ausgaben in der Berechnung mit ein. Der Runway Net bezieht sich hingegen auf die Net Burn Rate und beachtet neben den Ausgaben eines Unternehmens auch deren Einnahmen.
Runway Gross
Ursprünglicher Cash-Bestand / Gross Burn Rate = Runway Gross in Monaten
Das Unternehmen XY hat Anfang des Jahres 270.000 Euro auf dem Konto und weist eine Gross Burn Rate von 20.000 Euro auf. Dadurch ergibt sich ein Runway Gross von 18 Monaten.
270.000 € / 20.000 € = 13,5 Monate Runway Gross
Runway Net
Ursprünglicher Cash-Bestand / Net Burn Rate = Runway Net in Monaten
Das Unternehmen XY hat Anfang des Jahres 270.000 Euro auf dem Konto und weist eine Net Burn Rate von 15.000 Euro auf. Dadurch ergibt sich ein Runway Net von 18 Monaten.
270.000 € / 15.000 € = 18 Monate Runway Net
Wie lang sollte der Runway eines Start-ups sein?
Startups sollten einen Runway von etwa 18 bis 21 Monaten anstreben. Dies ermöglicht 12 bis 15 Monate, um Meilensteine zu erreichen, und weitere drei bis sechs Monate, um neue Finanzmittel zu beschaffen. Die ideale Länge hängt jedoch vom Geschäftsmodell, der Wachstumsstrategie und vielen anderen Faktoren ab. Laut Startup Genome haben 65 Prozent der Start-ups nur sechs Monate oder weniger Runway, 41 Prozent sogar weniger als drei Monate.
Um den Runway zu verlängern, sollten Start-ups deshalb Strategien zur Umsatzsteigerung und Kostenreduktion anwenden sowie nicht verwässernde Finanzierungsquellen nutzen.
Startup Runway verlängern: 3 effektive Strategien
Die Verlängerung des Start-up Runways ist entscheidend, um genügend Zeit für die Entwicklung des Geschäftsmodells und die Erreichung wichtiger Meilensteine zu gewinnen. Hier sind drei bewährte Strategien, um den Cash Runway zu verlängern und die finanzielle Stabilität eines Start-ups zu sichern.
1. Test revenue growth strategies
There are creative ways to increase revenue without significantly raising costs, thereby extending your runway:
- Upselling and cross-selling to existing customers
- New pricing strategies
- Targeting additional customer segments
2. Control and reduce costs
Startups should try to reduce unnecessary expenses as much as possible. Since rent and salaries are two major cost drivers for startups, alternatives such as renting co-working spaces or temporarily using freelancers instead of full-time employees should be considered.
3. Non-dilutive funding sources
To increase liquidity without diluting the company structure, startups should look into non-dilutive funding sources. A prominent example is venture debt. This is debt capital provided in the form of loans from external lenders or banks. The advantage of venture debt is that it increases liquidity without giving up company shares. However, this form of financing is often reserved for startups that have already successfully proven their business model and can demonstrate a stable revenue base.
Keep a close eye on your burn rate and cash runway – with Tidely
It is a well-known fact that financial bottlenecks are one of the main reasons startups fail (CB Insights). Therefore, it is crucial that you always have an accurate overview of your financial resources: How fast are you burning capital, and how long is your cash runway if you maintain your current income and expenses?
Knowing your startup runway and burn rate allows you to build a strategic plan for your company's future and keep your cash management in check.
Tidely offers you exactly this overview. Our user-friendly dashboard shows you not only your burn rate and cash runway, but also many other essential financial metrics. With Tidely, you keep a firm grip on your liquidity. Furthermore, you can use our cash flow management tool to create forecasts and simulate as well as analyze various financial scenarios. The insights gained not only support your internal decision-making processes but can also be effectively used in communication with investors via Excel export.
