Extending Your Startup's Runway: 7 Strategies for Stable Finances
When startup founder John Li had just a month and a half of runway left, he had to extend it, stat.
So, he would get on a call with every user, pitch them the product, and ask if they’d sign up for a $15 subscription. Ultimately, the startup was saved by a customer who offered to write them a $5,000 check.
But if this hadn’t happened, the startup would’ve had to shut down.
Scenarios like these are exactly why you should be proactive about maximizing your startup’s runway until you have a stable revenue stream and become profitable. In this article, we’ll cover 7 strategies to provide your startup with more financial breathing room.
What is a startup runway?
A startup runway is the amount of time your business can operate before the money dries up (if expenses and income stay the same). Typically, you measure it in months.
According to CB Insights, running out of runway is the most common reason startups fail.
And it doesn’t just affect small startups with relatively little funding.
Augmented reality startup Daqri (which at one point had $275 million in venture capital funding) shut down in September 2019 due to sales difficulties and inability to raise additional capital.
Then, there’s the story of Shyp (an on-demand shipping startup) that shuttered due to prioritizing growth at all costs. Even though it raised $63 million in venture capital, it failed to attract further investors that could keep the company afloat.
Tracking your runway will let you know when to start reducing expenses to proactively prevent such financial difficulties.
How to calculate your runway
Use the following formula to calculate your startup’s runway:
Runway = Current cash balance / Monthly burn rate
The current cash balance refers to the amount of money available in your bank account.
For the monthly burn rate, you can either use net or gross numbers.
- Net burn rate: How much cash you spend per month, factoring in revenue.
- Gross burn rate: How much cash you spend per month, excluding income.
Most startups prefer to use the net burn rate for a more accurate calculation. Unless they’re pre-revenue, in which case they’ll use the gross burn rate.
For example, if you have $500,000 in the bank and your net burn rate is $50,000 per month, your runway would be 10 months.
Make sure to revisit this calculation regularly because expenses and revenue fluctuate. Your operating costs might rise, customers might churn, or fundraising could take longer than planned, which will directly impact the length of your runway.
How to determine your ideal runway
When calculating your ideal runway, Mimi Ghosh (a Vice President at J.P. Morgan Commercial Banking) recommends having “enough runway to manage your planned meaningful next step to get to your next round of fundraising.”
According to one exhaustive analysis of financing rounds, the average time lapse between funding rounds ranges from around 18 to 22 months, increasing from one financing sequence to the next until you hit Series D.
So, a good rule of thumb for early-stage startups (seed to Series A) is to aim for at least an 18-month runway.
18 months gives you enough time to accomplish important goals (such as developing key product features and building out a sales team) and raise additional capital as needed. Later-stage startups might want to increase this number based on funding trends.
However, keep in mind that sudden disruptions to the financial market can always throw a wrench in your projections. Be agile and have sufficient cash padding to handle the unexpected.
7 strategies to extend your startup's runway
If your runway is shorter than expected, start planning to raise funds from investors or apply for a bank loan.
But because fundraising typically takes at least a couple of months, prioritize cost-cutting measures that immediately lower your burn rate.
1. Use AI and automation
Labor costs quickly eat away at your budget, especially if you’re trying to scale. Introducing AI and automation tools allows you to accomplish more without increasing headcount, extending your runway.
Customer support is a common example. Instead of hiring a large team to handle routine inquiries, chatbots can field a lot of those questions 24/7. More complex issues can be forwarded to the human team.
AI can also lower your accounting costs. For example, Digits’ automated accounting platform features AI bookkeeping that closes books faster while saving startups over $8,000 per year.
2. Invest in retention
Retaining customers is cheaper than acquiring new ones.
For SaaS startups, improving retention means you get more out of every customer, increasing the lifetime value (LTV) and reducing the pressure on the sales team to meet aggressive targets.
Remember that your retention strategy should target customers from the moment they onboard. A poor user onboarding experience leaves a bad first impression, placing you at a considerable disadvantage before you’ve even had a chance to build a relationship.
Other ways to improve retention include:
- Simplify billing and contracts: Make subscription renewals, upgrades, and downgrades as simple and transparent as possible to avoid frustrating customers.
- Offer loyalty or referral programs: Reward users with discounts, exclusive features, or incentives when they become brand advocates.
- Use data to improve customer support: Analyze user interactions to pinpoint and remove friction points.
- Monitor customer behavior for red flags: Track user engagement and identify customers who might be at risk of churning, then reach out with support or incentives.
3. Hire smarter
According to startup advisor Chris Saad, spending more money on hiring the right people will end up costing you a lot less.
“I’ve seen this viscerally across my portfolio of startups. I’ve seen teams that are executing a project that have literally taken six months to do something that I have worked with another company and seen them do it in six days. And in some cases, the team that did it in six days did it better,” says Saad.
Even though these hires cost more, their contributions allow you to execute projects more quickly. And they might even replace other people on the team. Saad explains, “The very best people are not just a little bit better. They are exponentially better.”
Building a great team is also essential for securing additional funding. Investors will be more confident in the future of your startup.
4. Cut back on office costs
Renting office space can cost anywhere from $100 to $1,000 per employee per month, which significantly shortens your runway. Not to mention the risk of rent increases.
“One startup I backed was recently hit with a substantial unexpected rent increase, which immediately truncated its runway. In response, the CEO strategically held off targeted expenses until he secured the next funding round,” says startup advisor and investor Marjorie Radlo-Zandi.
To avoid landing in a similar situation, consider going remote or hybrid. The pandemic showed us that people can be productive from their couches, coffee shops, or anywhere with decent Wi-Fi.
When you cut down on your physical office space or ditch it altogether, you're eliminating rent, utilities, cleaning services, office supplies, etc. This frees up thousands of dollars a month that can be put toward product development, marketing, or hiring new people.
Even if going fully remote isn’t an option, downsizing to a smaller, shared office space can do wonders for your budget.
Consider a co-working space. They’re more affordable than renting an office but still provide a professional environment. And instead of locking yourself into a long-term lease, you can rent space as needed.
5. Cut back on your tech stack
How many different apps and platforms does your startup use?
Reducing your tech stack is one of the quickest ways to lower your burn rate and extend your runway. According to the spend management platform Tropic, companies overspend on their software by almost 30%.
It’s easy for startups to accumulate tools — project management software, CRMs, analytics platforms, collaboration apps — each with its own subscription fee.
And don’t forget about the hidden cost of integration. Different tools don’t always play nice with each other, leading to manual workarounds or additional plugins that demand more of your time and money. By trimming your tech stack, you reduce the need for complex integrations and operational headaches.
The first step to getting rid of tech bloat is evaluating the apps your team actually uses.
A lot of startups fall into the trap of paying for multiple tools that essentially do the same thing. For example, why pay for both Slack and Front if your customer success team mostly uses Slack to collaborate?
Then, look at consolidation.
Many platforms offer all-in-one solutions that handle everything from project management to client communication. Switching to a comprehensive tool that replaces multiple other services will reduce your software costs. And it also simplifies workflows, which helps the team work more efficiently.
6. Lower customer acquisition costs (CAC)
Spending too much on customer acquisition is like filling a leaky bucket. You’re spending money on growth, but most of the growth is being consumed by expensive acquisition strategies.
Lowering your CAC requires you to dig into analytics. How do customers discover your product? What are the offers that lead to conversions? What are your top-performing marketing channels?
With these insights, adjust your customer acquisition strategy and double down on the things that work.
Also, evaluate whether your pricing strategy aligns with your CAC goals.
As an example, consider a SaaS startup that offers a free plan alongside paid ones. Too many of their customers stay on the free plan, even though feedback from paid customers shows that the premium product offers a ton of value.
To lower their CAC, they decide to do away with the free plan and replace it with a 15-day free trial of their premium version. At the same time, marketing shifts focus to their paid customer profile to grow revenue.
Another way SaaS companies reduce CAC is by shifting from paid advertising to content marketing. Companies like Buffer mastered this approach by producing tons of valuable blog posts and case studies that drive organic traffic from their target audience.
When done right, content marketing costs a fraction of paid advertising and delivers long-term benefits.
Instead of spending thousands on Google or Facebook ads that vanish as soon as the budget is gone, content marketing brings in a steady stream of potential customers over time. This lets you reduce your reliance on paid channels and maximize your startup’s runway.
7. Consider leasing equipment
If your startup develops products that require specialized (read: expensive) equipment, look into leasing it to extend your runway.
This is how Jacob Glanville, the co-founder of biotech startup Distributed Bio, pivoted when his startup’s budget was getting tight. Leasing equipment allowed them to go through a big inflection point and run multiple projects at once.
In addition to lab equipment, you can lease different kinds of office equipment, servers, IT infrastructure, laptops, and desktop workstations.
Maximize your runway with Digits
Without a clear overview of your finances, it’s impossible to calculate your remaining runway or adjust your burn rate.
Unfortunately, most startups grapple with the same accounting issues, such as late reports, complicated Excel models, and a lack of personalized financial insights.
The problem isn’t your accounting team — it’s the outdated financial systems they depend on.
Digits’ automated accounting platform connects to your bank accounts and credit cards, then presents the data in real-time dashboards and intuitive reports that make your finances actually easy to understand.
This includes revenue, cash flow, runway, and burn rate. Customize real-time reports to get the most relevant, accountant-approved insights. Plus, the platform finalizes month-end reports in a couple of days (not weeks!), so you can immediately share them with your investors.
For more info on how Digits can amplify your finances, sign up for a demo and see what the future of accounting looks like.
Switch to Digits today
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