Early-stage startup founders must’ve often heard from investors/ advisors to build runway for at least 18 months when fundraising. Yet, quite a few founders plan for much less. “We will raise Series A in 9-12 months” is a risky strategy, usually driven by an attempt to limit dilution.
There is a simple reverse-calculation to justify a minimum 18 month runway.
But before that, one simple advice: You shouldn’t forever be in fundraising mode (always be pitching, but not always be needing money). Fundraising is a time sink and keeps founders from 100% focus on business. So when you fundraise, raise enough.
Now, the reverse-calculation:
- When you’re in final paperwork stages of next fundraise, you should have at least 2 months of runway left in the bank. This is to protect yourself against hawkish investor behavior where they re-negotiate valuation/ terms at last minute (bad fish exist). If you’re days from being bankrupt, you’ll give in. But if you have some money left, you still have negotiating power or a chance to find an alternative.
- It usually takes a good 6 months to close Series A paperwork from the time you generate serious interest from VCs. On average, 3 months for multiple discussions to get a termsheet, 1-2 months for due diligence/agreement drafting, 1 month for filings & closure activities.
- To get to a point where you generate serious interest from VCs, you should’ve used the current capital to scale up to a stable, upward trend with at least 3-5x on key metrics (and also to provide commensurate valuation jump). Very rarely do early-stage startups have their growth channels figured out such that they can achieve this jump very soon, unless it’s viral (which you seriously cannot predict).
My advice is to keep a minimum 10 months for solid heads-down execution. This includes ~5 months of building & conducting growth experiments, and then the next ~5 months to apply those learnings to build a growth trajectory. This also builds in a little bit of buffer for 1-2 bad months (negative/ stalled growth) and recovering from them.
So, adding it all up, the thumb-rule is: 5 months build/experiment + 5 months apply/grow + 6 months fundraise + 2 months buffer = 18 months.
Even if you’re an adrenaline junkie, who doesn’t believe in too much buffer and is confident of shortening the fundraising process to 4 months – and if you raise for 12 months, you’ll have to initiate serious conversations around the 6-7 month mark, which still is too short of execution time in my opinion. It can happen, but in a FOMO market. Those days are gone.
In short, I strongly advise to fundraise for minimum 18 months.