How long is your runway?

John Paul
The lession will save you a lot of frustration, and buy you more time.

But before I go ahead with the lesson, it’s important to describe a very important concept every entrepreneur should know before they walk into a meeting with a professional investor.

It’s called a "runway".

The concept is the same with the runway at airports. It’s a stretch of road that allows an airplane to gain enough speed and momentum to take off.

Depending on the size and specs of a plane, the runway must be long enough for the plane to take off. And any plane that runs out of runway is unlikely to take off – it will crash.

So, why do investors sometimes ask entrepreneurs about their ‘runway’?

When it comes to business, a runway is the amount of time a business has before it runs out of cash.

Any business that runs out of cash – like a plane that runs out of runway – will crash and close down.

The banks and finance types know this as ‘liquidity’ risk.

Therefore, as you try to raise capital from investors, you need to keep your eyes on the runway.

Remember, you don’t know exactly when that investment will come.

Some investors will make promises and blow air, but until the cash hits your bank account, you need to be super-focused on your runway.

That’s because most investors will not touch or fund a bankrupt business. If they get the impression that you’ve run out of money, you will be perceived as a high risk investment.

So, in today’s lesson, I’ll share some of the proven techniques that can help you buy more time and increase the length of your runway.

The longer your runway is, the more time you can buy for your business so it doesn’t crash before you’re able to raise capital.

Here we go…

The first is: Rent, don’t buy.

The biggest threat a young business faces is money or capital that’s ‘tied down’.

And the most common way to tie down capital is to own something – a building, land, a vehicle, equipment, etc.

Unless you have a lot of liquid capital in your business account, you need to think twice before spending on a major asset.

The problem is entrepreneurs are over-optimistic people. That’s why we often make spending decisions based on hope and positive expectations.

So, if you’re an agribusiness, don’t buy all those hectares of land in the beginning. Take out a 3 or 5-year lease instead, with an option to buy.

If you’re in the logistics or delivery business, rent the vehicle.

If you need equipment, find out if there’s an option to hire, lease or rent.

Yes, renting is expensive in the long-run, but it's more flexible and allows you to have more cash.

Remember, as a young business, your main goal is survival, and not the pride of asset ownership.

The less capital that’s tied down in your business, the more flexibility you’ll have with increasing your runway.

The second technique: Reduce inventory.

In the expectation of making big sales, most young businesses stock up on inventory.

The problem is, unlike an established business that can plan its inventory because it understands the behaviour of its customers, a young business doesn’t really know which products will sell the most.

As a result, you may end up with a lot of inventory that isn’t selling as fast as you expect.

That’s why some young businesses may have a lot of stock in the warehouse, but don’t have any cash to pay salaries or repair a broken vehicle.

Yes, buying inventory in bulk can be cost-effective, but until you have enough cash to spare, too much inventory could kill your business.

The third technique: Encourage early or upfront payment.

Credit is one of the common ways to reduce your runway.

A business may be profitable on paper and still go bankrupt. That’s what happens when your customers or suppliers are holding too much of your cash.

If your business allows customers to pay at a later date, introduce discounts to encourage early or upfront payment.

If a service is $100, for example, why should customers who pay today and those who pay in a month’s time be charged the same?

If you were a customer, wouldn’t you rather delay the payment as long as is possible?

The fourth technique is: Improve your margins

There are basically two ways to increase the amount of profit in your business – you can either reduce your costs, or increase your prices.

If you’re not the manufacturer of your product, you have limited options to cut the costs.

But with pricing, you can get creative.

All customers are not the same.

I repeat: all customers are not the same.

Some of your customers will be glad to pay for additional service, extra support, more convenience, more flexibility, or more something.

You just have to figure out what that extra is and make it an optional offering that will justify a higher price for the proportion of your existing customers who want more.

On top of your standard product or service, you can offer basic or advanced training, consulting, home service/delivery, VIP/Premium packages, etc.

Out of 100 customers, there is always that 5-10% who are open to spending on extras that make sense.

Think of extras you can upsell. That way, you can easily improve your margins and generate more cash for your business.

The fifth technique: Reward partners with equity, not cash.

If you find a talented employee whose salary could be a drain on your young business, work out an equity deal instead.

Only do this with people who you see as long-term assets in the journey of your company.

The reality is, you could pay him/her salaries for three full years and they can still quit on you.

But if you provide them an option to invest their sweat in the business for a bigger payoff in the future, you will find smart people who will take the deal.

Equity has a way of building loyalty that salaries and compensation cannot do.

The problem is many entrepreneurs are too afraid to share their future and dreams with other people.

Whatever you choose to do, just know that equity is always a tool in your toolbox that can save you a lot of cash and extend your runway.

And finally, the sixth technique: Cut your big vision into small chunks

Most young businesses are under unnecessary pressure because they’re trying to do too many things at the same time.

I see some young businesses that are already a ‘group of companies.’

They proudly call it ‘serial entrepreneurship’.

But I prefer to call it what it really is – a lack of focus.

Unless you have a treasury bursting with cash, why would you spread all your resources across so many products or businesses?

Businesses that do well start with one line of business and grow that into a cash cow. And then with the cash from that successful business or product, they invest into new or improved lines of business.

It’s just common sense.

Building a successful business is like chasing rabbits.

If you chase after several rabbits, you’re unlikely to catch a single one. But if you focus on one rabbit, the odds will be in your favour.

So, to recap…

If you’re trying to raise capital for your business, you’re in a race against time.

Because you don’t know when the funds will come, you need to keep your eyes on your runway.

Remember, investors hardly fund bankrupt businesses.

If you follow some or all of the techniques I’ve just shared with you, you will buy enough time and increase the length of your runway.

Like every pilot knows, as long as you have runway ahead of you, there’s still a good chance your plane (business) will take off.

And who knows, you may end up like the owners of MailChimp and Spanx who used these techniques to build billion-dollar businesses without taking a dime from outside investors.