Burn Rate vs Runway

Recently a CEO in our portfolio asked me a question that I get often:

As a startup with limited capital is it better to be cautious and stretch runway or should you be aggressive and reduce runway?

The answer of course is “it depends”.

You cannot save your way to greatness. If you don’t invest enough in your business you will likely not generate the growth and momentum needed to secure additional capital. And if you have already raised capital, you have signed yourself to a plan that depends on achieving growth and momentum. So stretching runway too much is likely not something your investors, especially if they are VCs, want.

There are times when it pays to stretch capital. Anyone who lived through the 2008 / 2009 nuclear Winter would have been well advised to cut back on spending. We did that at Tungle. We stretched our series A out for three years but as soon as markets corrected themselves we began aggressively investing in growing the business.

Also, if you don’t have product / market fit yet, there’s no point hitting the gas pedal.

I counsel the CEOs I work with to adopt an attitude of “mindful aggression”. Always be looking to move the business as fast as you can. But, be mindful of the downside risks associated with that. This assumes that the CEO and the investors are bought into a plan together. It also means that investors need to be prepared to bridge a company if they’re making progress but not quite there.

Being aggressive and increasing the probability of needing a bridge round is harder to do if you are angel-financed. Most angels don’t plan for reserves to bridge. Different story if you have VCs. Still, it’s a bit of a gamble. Will your progress be sufficient for your existing investors to double down if you don’t yet have enough proof points to attract new investors?

Speed is often the primary strategy. Companies moving the fastest and generating the most momentum are the ones that get funded and bought. I’ve posted on this before, but Mike Cassidy is 4 for 4 using this strategy.

As an investor, I don’t want to back (and especially don’t want to double down) on a cautious CEO. That does not mean I am looking for a reckless spender. I’m looking for that balancing act of mindful aggression. Predisposed to move quickly and aggressively. But mindful of the current status of the company and the means and objectives of current investors.