How to Think About Runway

Why Read: Crucial insights on managing runway, aligning it with valuation milestones, and making strategic decisions to extend cash reserves effectively.

Featuring: Sahil S (@sahils_r), VC at Stedu Fund

Link: “How Should Founders Think About 'Runway'? – Sequoia Capital”

Key Concepts and Tactics:

• Understanding the True Nature of Runway:

  • Point: Calculate runway using net cash and consider all factors affecting cash burn.

  • "The cleanest way to look at your cash balance is net cash, which is the cash you have on your balance sheet minus any debt you've drawn... Burn is cash in minus cash out. It takes into account things that aren't in your monthly P&L: for example, if you have to buy inventory upfront, or if you have capex outlays upfront, or for a subscription company if you collect upfront on yearly contracts—all of these things impact your cash burn."

• Monitoring Runway Regularly:

  • Point: Continuously track and recalculate your runway as it's not a static figure.

  • "Just because you have 8 years of runway doesn't mean you can forget about it and assume you're fine. As your revenue and expense base change, your runway can change very quickly. You want to stay focused on the burn number. You should be calculating your runway every single month and watching that number religiously."

• Aligning Runway with Valuation Milestones:

  • Point: Ensure your runway allows you to reach the next valuation milestone.

  • "Runway doesn't come in a vacuum. It's intimately tied to meeting valuation milestones... The rough mental framework is that well before you run out of cash, you need to make sure you have the fundamentals in order to meet your next valuation milestone."

• Assessing Your Runway Situation:

  • Point: Determine which runway bucket your startup falls into and act accordingly.

  • "Bucket 1: <12 months of runway, when it is existential to focus on your runway. Bucket 2: 12 months of the runway but not enough to raise a flat round based on rational metrics: Here it's critically important to focus on the runway. Bucket 3: Enough runway to raise a flat round, up round or reach cash flow positive: Stay the course and continuously optimize."

• Extending Your Runway:

  • Point: Analyze your P&L in detail to identify areas for potential cost-cutting or efficiency improvements.

  • "To understand which parts of your P&L need to be addressed, begin with the big picture and break it down into parts. Starting with net loss, you can break that into two parts: gross margin and opex... Keep breaking it down until you have a detailed view of the components that contribute to total net loss."

• Setting Realistic Goals:

  • Point: Set a realistic timeframe for reaching your next valuation milestone and plan your runway accordingly.

  • "Let's say your goal is a flat round. Given the market conditions, for many of us that's going to take us three years... If it takes three years, recommend you have four years of runway. The reason: as mentioned earlier, you want to raise 12 months before running out of money."

• Making Tough Decisions:

  • Point: Be prepared to make difficult decisions to extend your runway.

  • "If you're a global company, you might need to reevaluate certain markets. If you're a company that's relied on a marketing or sales investment in order to grow, you might have to reevaluate your strategy. You might have to increase pricing. This is scary, especially if you don't have time to fully test the value proposition."

Doing Things that Don’t Scale

Why Read: This article provides a playbook for cultivating a culture of open and rewarded disagreement, enabling startup founders to make higher-quality decisions by challenging their own assumptions.

Featuring: Adam Fishman (@fishmanaf), Interim - SVP of New Products at Mozilla, Author at FishmanAF Newsletter

Link to Article: “How To Do Things That Don’t Scale”

Key Concepts and Tactics:

• Embrace Unscalable Tactics for Early Growth:

  • Point: In the early stages of a company, embrace tactics that don't scale to drive growth and build customer relationships.

  • "I've long believed in the importance of doing things that don't scale. The original reference to this is Paul Graham's essay. Recently I've been reflecting on this concept from my own past and some of my experience working with other companies and boards."

  • "In this article I'll share some of the most profoundly unscalable, effective and enjoyable tactics I've experienced in my career across customer acquisition and retention, company culture, forecasting, product-building and more."

• Leverage Guerilla Marketing for Customer Acquisition:

  • Point: Use creative, hands-on marketing tactics to generate awareness and acquire customers in new markets.

  • "The earliest demand-gen activities (predating me) were our founders John and Logan dressing up in frog and beaver costumes on college campuses to generate awareness among students. When I joined we did the same thing at Berkeley's campus and gave away free pizza in between two food trucks at Sather Gate."

  • "Startup Raids sound quite a bit more nefarious than they actually are. We'd essentially show up at a series of early-stage tech companies, balloons in tow, and talk to them about Lyft at lunch while handing out ride credits."

• Exploit Non-traditional Marketing Channels:

  • Point: Identify and leverage existing platforms or communities to reach potential customers, even if it means using unconventional methods.

  • "We did two things in the early days of Zimride to take advantage of the mess of Craigslist: an organized calendar as a post and publishing Zimride listings as individual rideshare posts."

  • "Another favorite Craiglist tactic of mine was the Zimride Elite program. One of the consistent challenges of Zimride (and later Lyft) in the early days was ensuring enough drive supply. One way we addressed this was to "recruit" road warriors with Craigslist jobs postings who were already consistently driving between two cities (like San Francisco and Los Angeles) and guarantee them payment if they posted their ride on Zimride."

• Embrace Manual Operations for Better Understanding:

  • Point: Use manual processes to stay close to the data and understand the business better.

  • "Each day we'd pull some data from Microstrategy's data warehouse, clean it up, and refresh our forecasting + actuals. We did that every day because we had to and there weren't many automations that existed at the time."

  • "By pulling and integrating the data every day we got quite familiar with the performance of the business. It was a forcing function to pay close attention to the details. It's why, to this day, I emphasize that people are self-sufficient in gathering their own data."

• Foster Company Culture Through Unscalable Means:

  • Point: Invest in unique, personalized ways to build company culture, even if they don't scale.

  • "One of the most amazing aspects of Zimride, then Lyft, was the incredible culture we collectively created from the earliest days. One of those elements was a semi-factual, The-Onion-esque newsletter created by Paul Thompson and Grayson Badgley. In it, they shared news and updates happening at the company, some stretching of the facts, and important personal updates for our teammates."

• Launch With Imperfect Solutions:

  • Point: Don't let imperfect solutions stop you from launching; solve critical problems as you go.

  • "My final unscalable tactic was launching Patreon without a mechanism to charge patrons. We launched with the ability to store credit card information securely but not the ability to actually charge those cards and recoup some of the funds. For the first few months we paid creators out manually via PayPal."

  • "Because we paid creators on the 1st of every month as we grew quickly we basically had ~30 days to figure out how we'd charge the stored cards. We pressed the launch button without knowing how we'd solve that problem. If that doesn't foster a sense of urgency, I don't know what will!"