Runway tells you how much time a company has before it proverbially “crashes and burns” or for the more optimistic, how long it has to “get off the ground”. This means, how many months can the company continue to cover overhead and salaries before it runs out of cash and needs to close down. Hopefully the company will either reach cash flow break even, or some sort of inflection point in growth that will encourage follow on investment before that point.
The typical amount of runway a company should provide for at early rounds is 12-18 months. However, giving the impending “nuclear winter” of funding a lot of VCs are expecting, most companies are looking to add 18-24 months before the window closes. Sufficient runway is a vitally important consideration when you are making an investment. Raising capital is often very difficult and very time consuming, and the more reserves a company has, the longer they have to find product-market fit, or whatever it is they need to discover to become financially viable.
If they don’t have enough runway, you could end up having to write off your investment before they can really get started on understanding the needs of the market. So make sure that you evaluate just how much cash the company is “burning” each month. This is known as the “burn rate”. Ideally you want the cash reserves of the company to be about eighteen times the burn rate post funding. If not, the company is at substantial risk of going out business before they have figured out how their business really works.A lot of companies have failed because they ran out of runway, not necessarily because there wasn’t demand for their products. A recent cautionary tale of a company that ran out of runway and crashed and burned in epic fashion is Zirtual. They ran out of cash on a Sunday night and promptly emailed all their customers and employees that the company was officially out of business Monday morning. Great concept, great product, willing market, but not enough runway to get off the ground. Don’t let that happen to your company or your investments.