Capital runway
How long before you run out of cash? Your capital runway is the answer

How long before you run out of cash? Your capital runway is the answer

In the start-up world the concept Capital Runway is used to assess the number of months until new capital needs to be raised to secure if your business will survive or not. This means that regardless if your business is in the start-up phase or in an extensive growth journey it is crucial to be aware of the number of months your company has left before it runs out of capital.

A well-loved concept often comes with many names, this is also the case for capital runway, also referred to as:

  • Startup runway
  • Financial runway
  • Funding runway
  • Cash runway

As a start-up or even a serial entrepreneur, keeping track of your company’s capital is one of the main ingredients to secure financial success. However, to further advance your business activities the need for additional capital is often obvious. Today, two common ways to increase your company’s capital are;

  • Increase sales
  • External funding by a bank or Venture Capitalist (VC)

 

 

“Today a company needs to be more forward looking and plan for long term funding, and this is where capital runway comes to play” says Vesa Riihimäki Head of Nordea’s Startup and Growth in Finland.

Capital Runway is an essential planning tool to calculate a company’s strategic flexibility, which includes the trade-off between costs, capital rising and growth. Frequently recalculating capital runway aids a company to keep track of their financial outlook.

How many months of capital runway is recommended?

It is well known that raising capital takes a lot of effort. Many companies also underestimate the time needed to raise equity, the process often takes 6 months from start to finalization, so planning is key. During the process a lot of the daily activities are involuntarily halted, meaning that you often need to prepare to raise capital also for your business’s non-operational activities, says Axel Bruzelius Head at Nordea Startup and Growth in Sweden.

A typical capital runway among startups is between 9 to 12 months. However, the venture capitalist Peter Sandberg, managing partner at Nordic Secondary Fund, says he prefers seeing a capital runway of 18 months.

The length of a company’s capital runway depends on each company’s individual situation regarding round success probability, growth stage and cost levels. Nevertheless, the longer capital runway a company has, the more time you got to reach distinctive milestones and prepare for the next round of external funding.

Want to extend your capital runway and become more attractive for external funding?

Regardless if you prepare to meet a financial institution as a bank or a venture capitalist you should have an answer to the following questions: Can your company become profitable? If yes, why? How credible are the assumptions in your hypothesis? To secure a positive outcome with an external investor make sure that you understand their investment criteria, so do your homework!

When meeting a company seeking for external financing, the following aspects are considered by the Startup and Growth unit at Nordea;

  1. A competent team
  2. Scalable business model
  3. Offered business value
  4. Current and prospect market size
  5. Risk awareness

Additionally, if your business model is sustainable it is also seen as a positive indicator. In similar manner Peter Sandberg express that Nordic Secondary Fund investment criteria is the business model’s scalability and robustness as well as leadership. To assess this, the key figures of Customer Acquisition Cost (CAC), Life Time Value (LTV), Net Promotor Score (NPS) and churn rate are evaluated.

Information about how to prepare and present your business idea to an investor, is found in our pitching guide or in the article “How to succeed in a meeting with a capital investor”.

Fact box:

Do you know how to calculate your company’s Capital Runway? No worries, we will guide you.

Cash balance 180 000 Euro
Expenses 60 000   Euro
Number of months until new founding 12 months
Calculation
Cash balance 180 000
Expenses -60 000
Total 120 000 Euro
Time duration 120 000 = 10 000 Euro in monthly cash burn.
  12 months

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