19 January 2023 |

How Much Runway Should We Raise For?


Besides asking When Should I Raise? and other questions about timing, founders are also asking about how much runway they should raise for in the current venture climate.

This is an absolutely critical question to answer. Your company’s survival most likely depends on answering this question as close to reality as possible. Underestimate how much capital you need, and you’ll end up sold for parts or sacrificing your vision for revenue. Overestimating is bad too—you can end up with too much money and a too high valuation with unrealistic growth expectations…leading you down a pretty shitty road.

This question gets even more muddled when considering an impending recession—some are projecting a global recession, others are seeing one only affecting the US and other developed countries, but in any case, the liklihood of a recession in 2023 is certainly high. A recession slows everything in tech down—from the dollars trickling into venture capital to the creation of new, funded, startups and companies hiring aggressively.

Creating a clear roadmap of runway projections is becoming an important skill that helps your deck/presentation stand out above others. There’s a lot of chatter about data rooms and how much work early stage companies should do when they meet with VC’s for funding. Frankly, over the last few years, the standards for fundraising over the last few years have gotten incredibly lax—and that’s mainly on VC’s, not founders, for not clearly defining expectations and going against their standards for investment. Doing a lot of work upfront is only going to help make your pitch stronger—it shows that you over-prepare and over-communicate and builds a lot of trust in the founder-VC relationship. The more polished your presentation and materials, the more “backable” you’ll instantly be to VC’s, even in early stage rounds.

Now, back to the actual question: our recommendation now is that you should be raising for a minimum of 18 months runway. The idea runway for early stage companies should be between 24-36 months.

This may sounds like a lot. Egregious, even. But there are a lot of reasons why you’ll want to bolster your coffers the next time you raise:

a) Your Business Will Slow Down: Everything slows down in a recession; the chances your business is recession-proof is pretty low. If you haven’t launched yet, your TAM is getting smaller and much more expensive to acquire (if they even convert at all.) If you have, hitting the growth rates/expectation from 2019-2021 is just flat out unrealistic. These misaligned expectations is causing a lot of top tier executive talent to churn from mid-stage companies—these startups raised off of inflated growth rates and are expecting the same results in 2023/2024. Smart executives aren’t even attempting—they’re leaving to take time off or find a better role at a well-funded early stage startup.

b) It’ll Get Harder To Raise: It’s always harder to raise after your first round. You get graded on how you’re doing compared to your peers, you’ll need to perform and crush milestones, and you’ll need to be fundraising whilst doing that. And, on top of that, the venture ecosystem will be tight for years; seed-Series B rounds will probably take a massive hit, just given how inflated they were during the last boom.

Some scenario planning: if a recession lasts 2-3 years, you’ll probably need to raise around halfway through that period if you raise for 18 months of runway. At 24-36 months, you can avoid the whole recession all together and hopefully wait it out for another bull run.

More importantly, having a bank account full of cash will create a peace of mind, help you focus on execution, and help you attract talent. The actual number behind the runway matters less than the effect it’ll create. Telling a VC or a new recruit that you have 2-3 years of runway as an early stage startup creates security in the company, the vision and product, and the founder (who was smart enough to raise a lot before a recession.) Telling them you have 12 months or less of runway will force them to wonder whether the company is goinaround long enough for an investment or an employee’s equity to be worth anything.

At the end of the day runway isn’t everything—FTX had years of runway apparently but went to 0 in about a week. Similarly there are dozens of early stage startup stories about companies with 3 or 6 months of runway, and pulled themselves out of it and built a great company. The part that doesn’t get mentioned in those stories is the hard work and ton of stress those financial predicaments caused. With 2023 gearing up to be a tough year for everyone economically, make sure that you have enough runway to weather the storm without the added headaches.