What Is Your Startup’s Cash Runway?

Now that you know what is your cash burn rate, you may understand this post’s question.

Your Cash Runway is the amount of time your startup has before its cash balance turns into negative.

For example, if your startup’s cash balance is being reduced by $5,000 per month, and you have $20,000 as available cash, in 4 months your startup will be out of money.

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What Is Your Startup’s Cash Burn Rate?

Cash Burn Rate is one of the core financial metrics you have to keep in mind, all the time.

Okay, but what is it?

There are 2 different burn rates:

  • Gross Burn Rate: It’s the average amount of money, monthly consumed, to pay for your startup’s activities. In other words, it’s how much money you are spending per month to pay for salaries, rent, energy, marketing, development, services, and other expenses.
  • Net Burn Rate: It’s the average monthly negative cash flow. For this metric, you’ll consider not only your expenses, but any revenues that you might have too.
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Are You Founding a Startup Or A Small Company?

Your first step in building a successful startup is… to be sure you should really found a startup (instead of a small company). Seriously, think about that.

In the last years, the word “startup” became so popular that it’s commonly used as a synonym for ‘a small company’ or ‘a company recently founded’.

And, believe me, the difference is huge.

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How Relevant Is The Problem You Are Solving?

Probably, in your own life, you’ve faced the problem you’re trying to solve—in your work, with your husband, your wife, your kids, your hobbies, etc. And for that problem, you didn’t find a good solution in the market.

Maybe you are familiar with a bad situation that happens with other people and you feel compelled to help them with your knowledge on solving that issue.

You know this problem quite well. Right?

However, when you decide to build a business based on a solution you’ve created to address a problem, it is not about you and your thoughts anymore; it’s about your customers’ lives.

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What is Your Startup’s Market Size?

Even with a great idea you won’t go too far if there isn’t a big enough market that allows your startup to grow significantly. That’s why you should assess the size of the opportunity you’re working on, since the very beginning.

MARKET SIZE IN 3 STEPS

Certainly, there are several ways to estimate your startup’s market size and you should look for the most reasonable methodology in your case. The most important is to work on some kind of logic. Here, we’ll base our logic on 3 well-known market concepts: Total Addressable Market (TAM), Served Available Market (SAM) and Target Market.*

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Define Your Startup’s Minimum Viable Product (MVP)

You’ll only be able to generate good traction when all the three elements of your idea are properly defined—the problem, the solution and the business model.

Which means your assumptions about each one of these elements have to be true.

And to know which of your current assumptions work and those that should be replaced by better assumptions, there is just one way, my friend: to validate them in the market—with real people.

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Think Exponentially When Building Your Startup

With the first version of your business model canvas, you are ready to check if your assumptions will succeed or fail.

However, I ask you to think BIG.

Salim Ismail, Michael Malone and Yuri Geest identified 10 attributes of what they call the Exponential Organizations (check their book here):

An Exponential Organization is one whose impact (or output) is disproportionally large—at least 10x larger—compared to its peers because of the use of new organizational techniques that leverage accelerating technologies.

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Assessing Your Startup Idea: The Problem, The Solution And The Business Model

Once you are completely sure about founding a startup (and not a small company) it’s time to assess the current strength of your startup idea.

Of course, this very first assessment is not a prediction of your startup success. Instead, the intention is to help you on thinking about the components of a great startup idea and which of these components you still need to further investigate and validate in your own idea.

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Startup Team: Recruiting, Evaluating and Convincing People to Jump On Board

And here we go to one of the most crucial things to be defined at the beginning of your startup: THE INITIAL TEAM.

As Alexander Varvarenko, founder of ShipNext, told me once:

…we spent one and a half year building a team. That team was tested on different other projects.

You must consider investing a significant amount of your time in the task of recruiting people. These people may be: co-founders, employees or outsources.

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