Don’t be the startup that accidentally runs out of money

A few years ago, I met a founder with only two months of runway left. In two months, his company would shut down because he didn’t have any cash to support it. He wanted to discuss whether he should start fundraising for his second round. That’s some scary shit. We should have had that talk when he had 6 months of runway left.

Here are the two scenarios you should never run into:
  • You don’t know how much runway you have left (i.e., you could run out of money in 1 month, 3 months or 9 months. Your startup death day is unclear)
  • You know your runway, have less than 6 months of cash and you’re not executing a plan to fix the situation.  

When you have less than 6 months of cash in the bank, what do you do? The options are pretty simple:

  1. Get profitable (increase revenue, decrease burn or do both)
  2. Raise more money
  3. Get acquired
  4. Get blindsided when you run out of money because you didn’t have enough time to execute on 1, 2, or 3.

I’d recommend hustling like crazy to do 1, 2, or 3. If you run out of money, at least you’ll have done everything under your control.

Running out of money should never happen because you didn’t leave yourself enough time to execute. When that happens to companies, it’s unnecessary and tragic. Who knows what would have happened if you had given yourself enough time?

The sense of startup self-preservation is an amazing thing. When runway is low, founders often execute better and focus more. But, the only way to trigger that self-preservation is to know well in advance that the end is coming and to put a plan in motion. That’s why it’s always important to track your runway and think of 6 months as a red line.

Don't let yourself be blindsided. And, if you have less than 6 months of runway, no plan and want to meet - please don’t mention it until I’m at least one beer in.
24 responses
Garry Tan upvoted this post.
Totally agree with your thoughts. So sad, yet preventable. One of the problems I see is that the startups do not have good forecasting models that will allow them to predict their cash flow. This is particularly important once they start generating revenue as forecasting the cash can become surprisingly complicated very quickly. A change in contract type or payment terms can have a dramatic effect on cash flow and runway. If you don't have some decent models, all of a sudden it's "what happened..."
Solid post! HelloSign is a SaaS company so you can predict revenue relatively well - do you still try to keep 6 months runway in the bank at all times?
Brad, it depends on the type of product you sell and the complexities involved. SaaS is pretty predictable. But, I imagine that if you’re dependent on a few elephants, it’s extra risky: Rishi, even though 6 months is the general rule, I think startups should have more. If you discover a new channel, you want to have capital on hand to take advantage of it. Either way, SaaS companies have pretty predictable revenue, so you can be really deliberate about cash flow. How much runway do you usually recommend?
Founders of two different startups have approached me with the same question: "We have 2-3 months of runway left. When do you think we should start raising money?" I had the exact same reaction you did, Joseph. Good that you're warning about this common phenomenon. Problem can usually be solved by founder dedicating an hour per month to compiling or at least overseeing the startup's monthly balance sheet.
Jake, exactly. People assume way more risk than necessary by simply not paying enough attention. It doesn’t take a lot of effort to track cash flow every month.
This sounds a bit like a lesson of tough love, but I think many startup creators need to have their first startup completely fail to learn some valuable business lessons. Many business models that companies launch with are completely flawed. This usually happens when they try and create a site with a poor (or literally no) business model and give away everything for free. It takes a massive scale to operate a free site and make enough money on ads to support a business. Generally speaking though, besides a troubled business model, many startups have trouble finding a cost effective way to gain enough paying customers. There’s so many different strategies to try (email marketing, search ads, display ads, content marketing, even buying likes through the types of companies listed at for instance) and each business category is affected differently by different types of ads that are worded differently. A lot of smaller startups that aren’t too sophisticated waste much of their runway throwing money towards ads that aren’t effective. They don’t measure their stats and see what gets them a good return on their investment. This is critical to maximizing what you have when you start out with so little.
Disagree. 1) Startup founders can't focus on making great product and finding product market fit AND fundraising. There's a HUGE opportunity cost to seeking money early. 2) I know plenty of startups who get money in 1 month from asking. Saying don't run out of money" is one of those useless "lessons" everyone in SV keep regurgitating to one another. Just like "release an MVP and pivot". There are not many rules to how to pull off a success. And very little to "learn" (beyond common sense) from articles and meetups and conferences. FOUNDERS: Stop reading click bait articles, and get back to work.
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