In this article, we’ll be explaining what startup runway is. We’ll also be discussing how to calculate your gross burn rate, net burn rate, and startup runway.
What is Startup Runway?
A startup runway refers to how many months your business can keep operating before it’s out of money. Its usefulness extends beyond the beginning stages of running a business, as it can be used for budgeting, strategizing, forecasting, and fundraising.1
Although the term “runway” might bring a fashion show to mind for some, your startup runway is better thought of in terms of an airplane. Does the airplane have enough space to safely take off and land? Does your business have enough money in the bank to reach its goals? Do you have a plan to use those funds properly?
Unlike a fashion show, a startup runway isn’t necessarily glamorous. A plane can just as well crash as take-off successfully, and unfortunately, the same applies to a business. This is why a startup runway is so important: it determines whether you have the right amount of funds and whether you’ll use those funds effectively. There’s also a social advantage to knowing what your startup runway is, as it can be useful information to venture capital firms and angel investors.1
Gross Burn Rate and Net Burn Rate
Before calculating your startup runway, there are a couple of other things you’ll need to know.
The first is gross burn rate, which refers to how much money you spend each month.2 Imagine you’re starting a business on January 1, 2022, and you have $200,000 in your bank account. By the end of the year, you have $80,000. By subtracting your remainder from what you started with and dividing it by 12, you’ll figure out your gross burn rate.
For example, $200,000 – $80,000 = $120,000. $120,000 / 12 = $10,000. So, your gross burn rate in 2022 was $10,000.
The second is net burn rate, which refers to the discrepancy between how much cash is coming in and how much is going out. To calculate your net burn rate, subtract your monthly income from your monthly expenses.3 Think of it like golf: you want to have a low score!
Let’s return to our number from before—the gross burn rate—where you were spending $10,000 a month. Perhaps your income for September was $6,000. Your net burn rate for that month would be $4,000.
What is Your Startup Runway?
Now that we’ve laid the groundwork, you’re ready to calculate your startup runway. All you need to do is take your beginning cash balance and divide it by your net burn rate.4 This will tell you how many months your business can thrive for before you’re out of money.
In our case, this would be $200,000 / $4,000 = 50 months.
This example is admittedly optimistic, given that 18 months is considered a healthy startup runway length.4 Regardless of whether your business can last for 18 months or 50, being organized is essential. Planning a successful launch, aligning stakeholders, and figuring out the costs of your goals are just a few of the important things to consider.5
As you start your engines and line up on the runway, remember that your “startup runway” refers to how many months your business can survive before you run out of money. Before calculating your startup runway, you need to know what your gross burn and net burn rates are. Although these are easy calculations to make, the preparation that goes into launching a successful business cannot be overstated. Prepare for takeoff!
Download this resource Startup Runway – What Is It and What’s Yours?.
1 “3 Ways to Extend Your Startup Runway and Reduce Cash Burn.” Brex. https://www.brex.com/blog/startup-runway/
2 “How Long is Your Startup Runway?” Medium. https://medium.com/corl/how-long-is-your-startup-runway-6eed37962445
3 “Burn Rate.” Baremetrics. https://baremetrics.com/academy/burn-rate
4 Vick, Aaron. “How Long Is My Startup Runway? A Guide to Calculating and Managing Monthly Burn Rate.” Forbes. https://www.forbes.com/sites/forbestechcouncil/2019/07/31/how-long-is-my-startup-runway-a-guide-to-calculating-and-managing-monthly-burn-rate/?sh=2297b5136caa
5 “Does Your Startup Enough Runway?” J.P. Morgan. https://www.jpmorgan.com/commercial-banking/insights/does-your-startup-have-enough-runway-to-survive