Cash Runway

A cash runway refers to how long a period of time a business would be able to continue normal operations before running out of cash.

It is expressed as a period of time usually in months.

For example, $1,000,000 of funding would provide a company with a cash runway of 6 months when it has a burn rate of $125,000 per month.

The runway is a term that is most commonly used in the world of startups and venture capital where young companies are not mature enough to generate self-sustaining revenue.

In all likelihood, most would be in a high growth phase where they are spending big money on marketing expenses to acquire and grow their customer base. Or spending their budget on developing valuable intellectual property.

Because they are not profitable, regular fund-raising activities has to be conducted in order to keep the light on in the office.

They might even be profitable but do not have positive cash flow.

Runways are also often tied to milestones that key company promoters want to achieve.

For example, the last round of funding might be meant to finance a particular phase of the company’s product development or a proof of concept. When that goal is attained, the milestone is achieved. And the next goal is scheduled for a new round of fund-raising with a new milestone.

Cash runway and investing decisions

The cash runway is one of the key things that an investor would look at when considering whether to invest in a startup.

This is because the extended runway that his or her funds would provide the company enables the investor or judge how far the company would have progressed before it runs out of runway.

Would the milestone be reached? Would the startup consume more cash than projected? Is revenue growing?

Where the company would be at at the end of the new runway would determine whether the value of the company would increase or decrease.

If the business is making great progress, then it’s valuation would increase, and new investors might be interested to get involved at a higher share price to the price at that last round of funding.

If the business has not moved forward at all, or has regressed, then there’s every chance that it would run into a down round.

In fact, if an investor is assessing the viability of a business now, it implies that the business is currently in the final phases of the last runway. So the investor should be able to evaluate how well the company has done in meeting objectives set for the funding raised in the last round.

Startups would have projected how much money is needed in order for the company to reach it’s short term goals. And this would influence how much cash they intend to raise at different series rounds.

Should a venture capitalist offer a smaller amount than what is required by a startup company, then the lower amount of funds would provide a shorter runway to attain it’s goals.

This can easily lead to failure, or provide a convenient excuse for failure.

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