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How long should your runway be?
One of the first questions you need to answer when you are planning your fundraise is how long your runway will be after your raise.
This is key because it determines which milestones this funding will allow you to hit, how much funding you need and when you will need to raise your next round. If you don’t have an answer to this question, the rest of your raise will fall apart quickly, it really is one of the most fundamental aspects of planning a raise.
For over a decade, the answer to this question has almost always been 12-24 months but heavily weighted towards 18-24 months. Recently, however, we have seen long times between rounds, so is this still the “default” answer you should turn to? Let’s look at why it is now taking 30-36 months between rounds.
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Round sizes - 10+ years ago a pre-seed/seed round was normally capped around $2M. Today we are seeing these rounds regularly rise to $5M. Because of the size of these rounds, investors are also increasingly taking larger stakes in companies (20-25%) instead of the traditional (12.5-20%). These two factors have led many founders to try to skip a round where possible. If they can go from pre-seed to Series A or from a large Seed to a large Series A (Series B-sized), then they can save themselves an entire round of dilution, meaning they have 20% more shares when they exit; this can be tens of millions in real dollars. If you want to skip a round, then you need to have two rounds where you can raise a 36-month runway, meaning those two rounds fund you for 72 months, instead of three rounds with a 24-month runway to fund you for 72 months. This is also something you need to strategically plan early on so that you can properly execute without running out of money.
Raise Times - The time it takes to raise a round has increased significantly in recent years. This means that founders often want to limit the amount of time they spend raising. They would rather raise 36 months of the runway at a pre-seed valuation than raise 18 months of the runway at a pre-seed valuation, work for six months, and then start a 12-month raise to get their Seed round to promote a higher valuation. Often it makes more sense to take the hit upfront, work to skip a round to make back your equity and spend more time focused on your company and less time fundraising.
How long of a runway do you raise for? |
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