Runway

What is runway?

Runway (the range of liquid funds) is the number of months for which a company's freely available liquid funds last at the current or planned cash outflow without new capital. Cash runway and liquidity range are used as synonyms. Liquid funds are cash in hand and bank balances; the cash outflow is the amount by which they fall month after month. The calculation resembles the remaining range of a car: the contents of the tank divided by consumption. The metric matters above all for growth companies that still spend more than they earn.

There is no statutory definition. Runway is derived from liquidity planning and appears in investor reports, in the financial model and in the data room of a funding round, that is, in the collection of documents that investors review before making their decision. Lenders use it for growth loans, and in insolvency law it supports the going-concern forecast.

Calculating runway

Formula: Runway in months = freely available liquid funds / average monthly net cash outflow

The relevant figure is the net cash outflow (net burn) without new financing. It comprises all payments, including interest and loan repayments, less the receipts from the business. Inflows from capital increases and new loans never count: they increase the balance from which the runway is calculated. The result becomes reliable through three determinations: which funds count, how the outflow is measured, and whether the current or the planned outflow is used as the basis.

Which funds count

Only funds that the company can dispose of immediately and without restriction belong in the calculation: cash in hand, bank balances and fixed-term deposits that are available at short notice. Pledged balances such as rental deposits, grants not yet paid out and commitments from investors before payment do not count. An unused credit line is shown separately, because banks can terminate or reduce lines in a crisis.

How the outflow is measured

Payments are counted, not expenses. Depreciation reduces the result but not the liquid funds. Loan repayments, investments and advance tax payments, by contrast, reduce liquid funds even though they do not appear in the income statement, or appear at a different time. The outflow of a single month fluctuates with payment dates, which is why an average over three months is common. One-off items such as a back payment of tax, a severance payment or an annual licence paid in advance are shown separately so that the ongoing consumption remains visible.

Gross cash outflow (gross burn), the sum of all payments, is also frequently considered. It shows the cost base and therefore how sharply the runway shortens if revenue collapses. The term burn rate is used for both figures.

Static and dynamic runway

Static runway divides today's balance by today's outflow. It assumes that costs and income remain unchanged. Dynamic runway results from rolling the plan forward month by month: planned hires, price changes, revenue growth, seasonal fluctuations and repayments falling due are fed in month by month. The end of the runway is then the month in which the balance falls below a defined minimum liquidity. This lower limit usually covers at least one complete payroll run with the associated contributions and the next tax payment dates.

Scenarios and management

A single figure describes only the expected course. In addition, companies usually model a cautious case in which revenue fails to materialise, large customers pay later and the next round is delayed. An optimistic case shows whether hiring can be brought forward.

Scenario modelling becomes effective when management defines in advance which measures apply at which runway, for example a hiring freeze below twelve months and a cost reduction programme below nine months. The levers include postponed hires, fewer external services, annual advance payments from customers, shorter payment terms and staggered investments. Whether a company reaches break-even under its own steam before its funds are used up is described by the term default alive.

Runway and funding round

Time required for a process

In practice, a funding round often takes six to eight months from preparation to the receipt of funds. It comprises preparing the documents, approaching investors, negotiating the key terms (term sheet), review by the investors (due diligence), notarial authentication and payment. A runway of 12 to 18 months at the start of the process is therefore regarded as appropriate in practice: after a process lasting six to eight months, at least four months of reserve remain.

Negotiating position with a short runway

Runway determines how much time a company has for alternatives, and investors can see it in the financial model and in the bank statements in the data room. If it is short, their willingness to make concessions on valuation and terms falls, because a breakdown of the negotiation weighs more heavily on the company than on the investor. Typical consequences are a lower valuation and a higher or multiple liquidation preference, that is, priority for the investors in the distribution of the proceeds of a later sale. Further consent rights are added, and there is no time for a competition between several offers.

If the runway is not sufficient for a regular process, two routes mainly remain: reducing the cash outflow before the process begins, or extending the time with funds from the existing shareholders. Such bridge financing is frequently granted as a convertible loan, which is converted into shares in the next round. Both are ideally decided before the first approach to investors. A bridge that is negotiated only during ongoing discussions shows new investors how tight the situation is.

How long the new round should last

The capital requirement of a round follows from the runway it is meant to create; a sizing of 18 to 24 months is common. More convincing than a number of months is a milestone that supports the next round, such as a particular level of recurring revenue. The amount then covers the cash outflow up to that milestone, the duration of the next process and a reserve.

Significance in insolvency law

A short runway is not in itself a ground for insolvency. It does, however, affect two tests under the German Insolvency Code (Insolvenzordnung, InsO) that are tied to a forecast of the ability to pay. Over-indebtedness (Section 19 InsO) exists where assets no longer cover existing liabilities, unless continuation of the business over the next twelve months is predominantly likely. Imminent illiquidity (Section 18 InsO) is as a rule assessed over 24 months. It entitles the company to file for insolvency of its own accord but does not oblige it to do so.

If the runway does not extend beyond twelve months, the going-concern forecast depends on whether follow-on financing is predominantly likely. The assumptions behind this must be verifiable, for example through binding commitments from the shareholders or sufficiently concrete negotiations with investors. If the going-concern forecast is negative, assets are valued at liquidation values, which for growth companies frequently do not cover the liabilities. Ongoing monitoring of this situation is part of early crisis detection, which Section 1 of the German Act on the Stabilisation and Restructuring Framework for Businesses (StaRUG) requires of management.

If the company is over-indebted as a result, management must file for insolvency without culpable delay, and at the latest six weeks after over-indebtedness arises (Section 15a InsO). If liquidity no longer suffices even for payments that have fallen due (illiquidity, Section 17 InsO), the maximum period is three weeks. Shareholder loans with a qualified subordination agreement, that is, an agreement to rank behind the other creditors, are disregarded in the over-indebtedness calculation (Section 19 (2) sentence 2 InsO).

Worked example: calculating static and dynamic runway

A software company has EUR 3.0 million in its bank accounts, of which EUR 150,000 is pledged as a rental deposit. Over the last three months, the net cash outflow was EUR 230,000, EUR 250,000 and EUR 270,000. From the fourth month, four hires are planned, which increase the outflow by EUR 60,000 per month. Management holds a minimum liquidity of EUR 300,000.

• Freely available funds: EUR 3,000,000 minus EUR 150,000 = EUR 2,850,000
• Average net cash outflow: (230,000 + 250,000 + 270,000) / 3 = EUR 250,000 per month
• Static runway down to a balance of zero: 2,850,000 / 250,000 = 11.4 months
• Usable above the minimum liquidity: 2,850,000 minus 300,000 = EUR 2,550,000; at the previous outflow, 2,550,000 / 250,000 = 10.2 months
• Dynamic, months 1 to 3 at the previous outflow: 3 × 250,000 = EUR 750,000, leaving EUR 1,800,000
• From month 4 at the increased outflow of EUR 310,000: 1,800,000 / 310,000 = about 5.8 months
• Dynamic runway: 3 + 5.8 = about 8.8 months

The 11.4 months of the simple calculation become 8.8 months once minimum liquidity and planned hires are taken into account. With a process lasting six to eight months, the round would have to begin immediately, and even a delay of one month moves the final negotiation to the end of the runway. If management postpones the hires until after the round, the runway stays at 10.2 months. If the existing shareholders additionally provide a convertible loan of EUR 750,000, the result is (2,550,000 + 750,000) / 250,000 = 13.2 months. The runway at the start of the process is then in the range of 12 to 18 months.

Distinctions: runway, burn rate, liquidity planning and break-even

• Burn rate: the monthly cash outflow, gross or net. Runway is the time-based figure derived from it.
• Liquidity planning: the planning instrument from which the dynamic runway is read off.
• Cashflow projection: the multi-year forecast in the financial model. It shows how much capital a round has to raise for the targeted runway.
• Break-even: the point at which revenues cover costs. Runway loses its significance only when cash flows are also permanently balanced, that is, when the company is cash flow positive.

Common mistakes

• Outflow derived from the income statement. The loss shown in the income statement is not a measure of cash outflow; what matters are the movements on the bank accounts.
• Committed funds counted in advance. An oral commitment, a signed term sheet or a grant award notice without payout extends the runway only once the payment is received.
• Static calculation only. If hires, a relocation or higher sales spending have already been decided, the static runway overestimates the actual range.
• Minimum liquidity not deducted. A calculation down to a zero balance overestimates the usable runway, because salaries, contributions and tax payment dates require a base amount that should not be undercut.

Frequently asked questions

How much runway should a company have at the start of a funding round?

In practice, 12 to 18 months. The round itself often takes six to eight months, and the remaining period absorbs delays and makes it possible to decline an unsuitable offer.

Does an unused credit line count towards runway?

Only with reservations. The usual approach is to calculate runway without the line and to show the line alongside as an additional reserve. What matters is whether the line is firmly committed, when it can be terminated and which financial ratios (covenants) it is tied to.

How is runway calculated?

The freely available liquid funds are divided by the average monthly net cash outflow of the last three months. With EUR 1.8 million in the account and EUR 150,000 of net burn, the runway is twelve months. Planned hires and a minimum liquidity shorten it, which is why monthly planning supplements the simple calculation.

Does runway affect the valuation in a funding round?

Indirectly. The valuation follows from the business model, growth and key figures, but a short runway weakens the negotiating position, because less time remains to compare offers.

The Roemer Capital view

Before Roemer Capital prepares a funding round with a company, it recalculates the runway from the account movements of the last months and compares it with the dynamic calculation from the plan. Its benchmark is 12 to 18 months of runway at the start of the process, because a round in practice takes 6 to 8 months.

If the runway is lower, Roemer Capital clarifies with management, before the first approach to investors, how it can be extended. Options include postponed hires, a bridge from the existing shareholders or an earlier, smaller milestone. The agreements for such a bridge are drafted by the company's law firm; Roemer Capital models the variants and brings them into the investor discussions.