Founders often view runway as just a number or equation, but VCs expect them to think beyond that. Sequoia Capital shared a framework on how founders should approach the runway. In this write‑up we’ll discuss…

• Runway Reality

• What is your runway right now? How should you calculate it?

• How should you think about how much runway you need?

• How do you extend your runway if you need more?

Let’s deep dive into this…

The basics: What is a runway?

It’s your cash balance divided by your monthly burn.

If you have $10 M in cash and $0.5 M in burn, you have 20 months of runway.

But it gets a little more nuanced than that. 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.

Cash Balance

If you have $10 M in cash but you’ve drawn $5 M in venture debt, you really have $5 M of net cash and you should use that number to think about your runway.

But why? The reason is that debt is borrowed money. It’s not yours. You owe it to a creditor. Similar to how you make personal budget decisions based on your assets minus whatever debt you owe, you should think about your company’s cash position the same way.

The TLDR is that having a line is a helpful lifeline when you’re facing a cash crunch, but drawing it comes at a cost. It makes it harder to raise your next round. It comes with covenants, which means debt holders can own more and more of your company. It can be a negative signal, and it can generate a lot of overhangs.

That said, one of our recommendations, if you are tight on cash, is to secure a venture debt line and just not to consider it part of your runway. Ideally, you don’t draw on it unless absolutely necessary, with eyes wide open to the trade‑offs.

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Monthly burn—this is different from your net income.

Monthly Burn

Net income is an accounting concept. 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. It’s critical to have a very tight grip on what your cash burn is. There may be ways to reduce the gap between EBIT and free cash flow—maybe that means paying your suppliers a little later or collecting revenue earlier.

If you have a lumpy business, meaning you have to provide cash upfront to build out capital expenditures or you’re purchasing inventory, it’s existentially important to have a very detailed understanding of your expected cash outlays. If you’re not careful in managing and forecasting these outlier expenses, then your runway can turn out to be 3 months when you thought it was 15.

One more thing: Runway is not static.

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.

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A Mental Framework For Founders - Runway and Milestone

If you are reading this newsletter, previously I have mentioned “You are raising fund not to increase your runway, but to achieve your milestone.”

As a founder, how should you look at this graph? Suppose you and your CFO put your heads together, and your best guess for how cash changes over time looks something like this chart.

This is your cash‑out point. 12 months before that, it’s time to think about raising again.

Runway doesn’t come in a vacuum. It’s intimately tied to meeting valuation milestones.

Green – Milestones & Black – Runway

Imagine you’re driving your car on the freeway and running out of gas. What matters is not how many gallons of gas you have in your car, but whether it’s going to last you until you reach the next gas station. Think about what your goal is for your next fundraising. Maybe it’s an up‑round. Maybe it’s a flat round. Maybe it’s a down round. Maybe it’s to reach a cash‑flow positive.

Whatever your goal is, which is a conversation between the leadership team and the board, there is some valuation milestone attached to achieving that goal. Figure out what metrics or “fundamentals” get you to your goal. Maybe it’s ARR. Maybe it’s Gross Profit. This is the green line on this chart.

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.

These two lines are intertwined. There’s a delicate balance in your scenario analysis between investing in growth and burning cash in order to make sure that you are leaving enough runway to meet the next milestone. It’s important to hope for the best but plan for the worst as you are plotting out how to make the math work.

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Raising your next round on pure story is not enough anymore.

That worked when the capital was plenty, but investors are now going to care about your metrics, and more importantly your financials. So it’s important to make sure that you are focused on getting that valuation milestone to the right place.

Now, you’ve done the exercise of figuring out your runway versus your metrics and valuation fundamentals. There are three possible scenarios for your runway situation:

1. Bucket 1: < 12 months of runway – when it is existential to focus on your runway.

2. Bucket 2: 12 months of runway but not enough to raise a flat round based on rational metrics – here it’s critically important to focus on the runway.

3. Bucket 3: Enough runway to raise a flat round, up‑round or reach cash‑flow positive – stay the course and continuously optimize.

Some founders are in Bucket 1. A few are in Bucket 3. But many are in Bucket 2. If we can emphasize one point in this write‑up it’s this: many founders may think they’re in Bucket 3 but are actually in Bucket 2.

The financials that you have to reach to cover your next round have changed. The bar has been raised. Many of us are 3‑4 years away from reaching our last valuation, with less than that amount of cash. In that case, it’s critically important to focus on managing the runway, even if you have years of runway remaining.

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So – how to extend your runway?

If you take us at our word that all probably need more runway than thought, the question is: How do you get it?

Like many things in business, it’s very easy to say and it’s very hard to do.

The first step in getting very tactical is to understand your current state.

This means looking deeply into your P&L. If you’re talking about runway, that means you’re losing money every month. So you have to figure out where the net loss comes from. Once you’ve identified the specific places in your P&L causing your burn, you can start thinking about which dollars yield efficient growth and which are not as helpful.

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.

Then break each of those down into component parts:

• What are all the drivers of your gross margin? What is the cost of sales, etc?

• What are all the drivers of compensation OPEX and non‑compensation OPEX? How much of the OPEX is dedicated to computer hardware, hosting and subscriptions, etc?

• Keep breaking it down until you have a detailed view of the components that contribute to total net loss.

Once you’ve identified the important contributions to your burn, you can plot them in terms of their burn impact on the y‑axis. Then there’s the …