When it comes to advice, tech loves standardization. Startups are often told that there are certain metrics to hit, deadlines to meet, timetables to measure themselves against.
Examples abound: Here’s the ideal amount of money to raise at your Series A round; here’s how many employees you should have before hiring this executive; here’s what stage to hire legal counsel; and, most recently, here’s what percentage of staff you should lay off if you’re unable to access more financing.
(The answer is 20% of staff, depending on who you ask).
There’s a response to some of these general statements: Startups are complicated, and one size certainly doesn’t fit all. But still, these startup standards help point companies in the right direction, at some point becoming the status quo.
That’s why when entrepreneur Paul Graham, the co-founder of Y Combinator, suggested that he’s seeing startups with 20 years of runway thanks to huge 2021 fundraises, it struck me. Isn’t the general advice that startups should have three years of runway? And if we’re in a more bullish market, 18 months?
My delayed reaction to this August tweet aside, let’s talk about runway. As you can tell by the headline of this piece, I think that the ideal length of runway is a myth — alongside other startup myths like more money equals more growth. By the end of this piece, you may agree.
Runway is a term historically used to describe how long the cash in a startup’s bank can keep it afloat. Layoffs fit into this because, when a founder cuts down operational or personnel costs, runway extends.
Video game coaching marketplace Metafy shared some math with TechCrunch that better illustrates this. The startup laid off 23% of staff last week. The cuts helped the startup reduce personnel costs by 19%, from $746,000 per month to $607,000. Other operational costs have been cut by 70%, from $306,000 to $100,000 per month. With these trims, CEO Joshua Fabian estimates that Metafy has a little over two years of runway if it stops making revenue. He specified that his company has runway until February 2024.
As Metafy’s story showed us, the strategy of “extending your runway” comes into vogue whenever investors slow down investing. For example, when the pandemic first began, Clearco launched Clearbanc Runway in 2020 to help startups navigate what was then expected to be a dry spell for fresh deals. If Clearco could provide some non-dilutive capital to startups that were unable to raise a new extension round, why not take it?
It was a creative play at a key time, but also addressed how divergent different runway needs may be. Founders could input the amount of their current runway, as well as cash balance, overhead, revenue, margin, growth rate and other criteria. Clearco then analyzed the data and offered money in the form of non-dilutive capital. Founders can repay the cash through a revenue share agreement. In order to be eligible, companies must have a minimum of $10,000 monthly revenue and at least six months of consistent revenue history.
In other words, Clearco looked at each startup and provided a different check based on the strength of the company. No blanket statements.
But let’s not just talk about the myth of the ideal runway from a defense posture — what about going on offense? Graham said he saw companies with over 20 years of runway. I have a few qualms with that.
First, it’s quite easy to say that you have 20 years of runway due to the cash in your bank and annualized growth patterns. But let’s say there’s a, oh I don’t know, once-in-a-lifetime pandemic that entirely shook up the way your business operates? Suddenly, 20 years of runway could look smaller.
Sure, 20 years of runway could just mean that the startup is so nearly profitable that it has a limitless runway and that it is confident in its future. But it could also mean that the founder isn’t taking as many risks as they should. Some could argue that 20 years of runway is too much runway. I mean, spend a little, right?
At least that’s how Itai Damti, the co-founder and CEO of banking-as-a-service platform Unit, views it. In an interview with TechCrunch, Damti confirmed that his company, not profitable yet valued at $1.2 billion, has a runway north of 10 years.
The founder’s conservatism comes from the fact that he previously bootstrapped a company to the growth stage. And even then, he admits that it’s important for founders to not only optimize for an ideal runway.
“If you have three people in the company working on a product but you don’t have a sales organization that is going to cost you half a million a month but is going to drive all of your success, then you’re an idiot and you don’t know how to run your company,” he said.
“You may not be ambitious enough; you may not have the right team,” he said. “There are downsides.”
It’s a discussion that Unit has often with investors and the team. The startup has not spent all of its $51 million Series B round or even touched its $100 million Series C round.
“You have to be very ambitious, and ambition means increased spend and making bets,” he said. “But the other viewpoint you need to have is that some things are not going to work out, some things are not the right thing to do. … I think it’s a balancing exercise.”
For example, Unit is working on a credit card product and launching a billboard campaign soon — but at the same time, it has pushed back on investor recommendations to launch internationally.
“I think that companies at all stages should spend once they raise. That’s why you raise. But they should spend, not align themselves with ‘an ideal runway’ because ‘they should’ or because their board told them to. They should spend from first principles,” Damti said.
As for if first principles are even more difficult to realize as a founder compared to runway, we’ll have to see.
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