Startups have been particularly vulnerable during COVID-19: Global VC funding has dropped, supply chains have been disrupted, and market activity has slowed.
The changes have meant fewer liquidity deals are available for investors, who now don’t have the funds to invest fresh capital into the wider startup sphere.
As a result, many startups need to extend their runway until investment recalibrates and funding opportunities come back. Some people believe this could take a couple of quarters, but looking at data from the 2008 crash, it’s more likely to take a couple of years.
Regardless of what type of startup you are — and whether you have just received funding or are looking to raise now — your runway has been affected by the pandemic. Startups often miscalculate their early-stage runway by being overly optimistic, not having a buffer, and not analyzing internal metrics deeply enough. Although you might not feel it immediately, not having foresight about your runway will severely impact your startup in a year’s time.
Look at it this way: If you know someone is going to burgle your house in six months, do you simply sit and wait, or do you take action to prevent it? Here’s how to realistically work out your startup lifeline and counter the effects of COVID-19 before it’s too late.
What’s the risk of not knowing my runway?
Startups that secured investment in the past three to 12 months will have raised based on where the world was at that time. These companies will have lost at least six months of runway amid the lockdown, falling sales, and increased burn rate.
Then there are startups looking to raise money now. These companies will eventually run into the same problem; they may assume they need to raise enough for a 12-month runway, when due to the lockdown it’s actually closer to 18.
In both scenarios, startups that misjudge their runway are at risk of not delivering what was promised as part of the raise. Scaled investment is based on startups achieving increased valuation at each stage, so not meeting goals could jeopardize the chances of funding in the future. If your startup finds itself in this position, you could be forced to take actions that are detrimental to your company — such as raising less money than you need and giving away more equity. These actions may seem insignificant but they cause notable damage to your business in the long run.
Accepting a smaller investment cuts your runway and adds pressure for you to produce results in a smaller, unfeasible time frame. You’ll then have to raise a second round sooner than anticipated, and if you do two or three rounds in quick succession, investors will have to ask why. You’ll make your company seem high risk and may be blocked from future access to funding.
How do I assess my current runway properly?
To asses your current runway, you first need to know the metrics you should be using. Runway can be assessed by dividing the money your company has in the bank by your monthly burn rate. You then need to consider that you will need to start your next raise at least three months before the money in the bank runs out. This time will be used to prepare a pitch deck, identify investors, present to them, and agree terms.
So you have to deduct those three months from your runway (if you calculated a 12-month runway to deliver all of the growth activities, you actually only have nine months to achieve everything in order to successfully raise another round). Startups often forget to include the three-month preparation period.
Then, every change you make in your startup has to be factored into the equation. If you want to hire more people or add a new marketing expense, or if the price of one of your tools changes, your burn rate is going to fluctuate — especially in the midst of COVID-19.
That said, you can use the greater economic situation to make predictions about your runway. You should already know the time you have lost due to the pandemic (for most startups, January was the start of the shutdown). Now research what’s happening in your industry; for instance, as airlines in the UK ground planes, airport expansion plans have also been halted, putting as much as £1 billion worth of construction investment on pause. With this kind of information, you can estimate how long it will take for your relative economy to return to a sense of normality.
You can’t ignore the worst-case scenario either. If you lose a full year because of COVID-19, that’s a hard but necessary truth to face. Rushing your runway will do you no favors in the long term.
I know my runway, how do I stay afloat?
If you’ve already raised money, start conversations with investors now and explain your situation. See if they are on board to help you through the crisis. These discussions have to be held now. If you ask investors for money in 12 months and say the pandemic is the reason, they’re not going to be sympathetic to your case. They’ll probably think you’re using the virus as an excuse for your lack of results.
Say you borrow $100,000 to build a house in January. You promise the investor it’ll be built in 12 months, but you get unexpectedly injured after three months and can’t work for the following six months. If you don’t inform the investor about the accident and your incapacity, you aren’t going to receive an extension, or future funding. If, however, you inform them as soon as you realize your limitation, it will be much more flexible in providing solutions. The same applies to startups. If you can forecast how much extra time you need due to the pandemic and tell investors early on, they will be more willing to accept a time loss at month three rather than month 12.
Naturally, investors will want more than a request. Look inwards and show that you’ve analyzed your startup’s health in detail. This means providing data, plans, and proof that you’re proactively adapting to the new environment. Remember that VCs are taking a hit too, so you’ll have to demonstrate you’re trustworthy with their money.
If, however, you’re a startup looking to raise money, you’ll have less time to negotiate and need to be more risk-averse in what you’re asking for. Build your runway in the exact same way you would have before the pandemic struck, particularly if you’re a pre-seed or seed company. Don’t overshoot your runway because you’re worried, but equally don’t compromise on funding because you think an offer is the best you’re going to get.
Startups that calculate their runway accurately have to stick to their guns during funding rounds. If an investor offers less money than you requested, counter it by asking for the original amount but in monthly installments. Accepting a smaller offer suggests you’re not confident about your business’s metrics and health.
Another option is to take advantage of alternative funding that is emerging, such as services that analyze startup data and offer money in the form of non-dilutive capital. Founders can then make repayments through a revenue-share agreement. Meanwhile, for UK-based startups, if calls for a “runway fund” in the UK are heard, loans that convert into equity stakes at a startup’s next financing round could become a reality and open up £300 million ($370 million) in government funding.