Managing your runway doesn’t have the instant gratification of winning new business. It doesn’t provide the intellectual challenge of developing new tech. Yet:
- If you manage your runway poorly, your business will not make it through scale-up.
- If you manage your runway well, it will have a massive impact on your long term wealth as a founder.
Managing your runway is as critical to your success as having the right idea and the right market.
#1 Be really clear on your next milestone
When the topic of runway management comes up, too many tech founders focus on cash. Remember that your runway is there to help your business take off.
You have to be clear about what your next business milestone is. When it comes to managing your runway, this is either;
- Securing your next funding round, or;
- Becoming cashflow positive.
All other goals or objectives must be part of an overarching plan that achieves one of those two things.
#2 Be strategic and realistic
As every good project manager knows, cash is not the only variable in project planning. You also have control over scope, time, and quality.
No matter how good you are at fundraising, the brutal reality is that tech start-ups and scale-ups never have as much cash as they want.
To maximise the runway you have, you must be strategic with those other three variables.
Scope
Make sure the features you plan to release are realistic given the cash you have. Ensure you have enough buffer in case your estimates are off.
When selecting the features to include, you have to be brutally commercial. Rank features on how they’ll help you attract, convert, and retain paying customers. Drop vanity projects.
Time
Is there an urgent need to get new features to market? If not, consider buying yourself more time by bringing in other income. This is especially effective if you don’t currently have investors.
A lot of your development work is routine. It doesn’t need the technical skills and experience of your founding team. Can you sell your time to bring in much needed consulting income? Then use this income to outsource or delegate routine work at a lower cost? If you can, then you can create time.
Quality
Code quality and strong development practices are important. Compromising them will do long term harm. But, code quality alone won’t pay the bills.
Sometimes, you’ll need to strike a balance. You might need to compromise on code quality so that you can get features out. Then refactor once you’ve got new funding in place, or once you’ve made it out of scale-up and are net cash generative.
#3 Spend money …
One of the biggest mistakes some tech businesses make is to cut back too hard on expenditure. It’s a natural instinct, you’re worried about running out of cash. So it feels right to extend your runway by minimising your burndown.
However, The runway analogy is there for a reason. The last thing a pilot would do when taking off is slow the plane down.
If you don’t spend, you don’t grow.
The danger is that you’ll cut back on things you need to spend money on to reach your next milestone. Meanwhile, you’ll have fixed costs that you can’t eliminate. The result is that you reduce you cash burndown, but your development burndown plummets. Although you feel like you’ve gained a few months extra runway, you’ve increased the time you need by far more.
#4 … but spend it on things that matter
The answer is to focus your expenditure on the things that matter. Be ruthless in evaluating every item of expenditure on how it helps you get to your next milestone.
Saving £100/month on development software is a bad decision if it makes your £10,000/month dev team 5% less efficient.
Spending £10k to outsourcing dev work that you’ve never done yourself but always wanted to learn may be the smart move. If it’ll take time to learn, and you’ll never need to do it again, that £10k is money well spent.
Instead, give up your cool co-working space. This’ll free up the cash you need to pay for the outsourcing and the software tools. It may feel painful, but it will be worth it.
Jeff Bezos built Amazon out of a converted garage in a rented home. He built his own desk using a reclaimed door and some four-by-four. His electrical supply couldn’t handle his computer and heater simultaneously. So he worked in the cold.
This is someone who’d quit a lucrative Wall Street job. He was used to luxury. But, he backed his vision and did whatever it took to make his savings last.
Always ask yourself “what’s the return on investment?”. Eliminate all vanity expenditure. Be a miser when it comes to anything that doesn’t get you to your next milestone. By doing so you’re not slowing the plane down, you’re making it lighter.
Spend (invest) as much as you can on the things that have a positive ROI.
#5 Build a longer runway
You need to be ultra disciplined in your cash flow management:
Tweak your pricing model and marketing so that customers are paying you upfront. You’ll have to give a discount for upfront or annual payment. It’ll feel wrong to reduce your turnover like this. But if this discount is lower than your cost of capital, you will be better off.
Do everything you can to avoid paying upfront for software and services. Negotiate payment terms, or at least pay month-by-month. You’ll pay more. But, unless your supplier is another start-up, the extra cost will be lower than your cost of capital.
It may feel a bit uncomfortable. It may be a chore. But extending your runway by a few months may mean you get that killer feature finished. And that feature may have a huge impact on your price per share in your next investment round. Or, it may get you cashflow positive without having to sell any more of your business.
P.S. whenever you’re ready …
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I help tech entrepreneurs build more profitable and strategic businesses so they can scale smarter | Virtual CFO and Founder of Oxwich Accountancy