Sarah Neill is a serial entrepreneur who has also been been working in innovation in the telco space for more than 15 years.
Her first startup was the travel tech company Doodad in 2013, followed by A Relatively Unique Inc, and most recently, the fashion tech venture Mys Tyler, which set out to solve the $1 trillion “fit” problem for women buying clothes online.
She recently sat down to talk with Quentin Wallace, founder of angel investment group Archangel Ventures.
With Neill in the midst of raising for Mys Tyler, the notion of “runway” was on her mind. And what she discovered while talking to Wallace was that like a busy airport, there’s more than one runway.
“So when people ask you, ‘What’s your runway?’, perhaps a better answer would be ‘Which one?’,” Neil says.
Together, the pair identified four kinds of runway: financial, equity, emotional and financial; that startup founders have to think about.
They picked them apart and took turns explaining them below. Here’s what they had to say:
Sarah: Outside of aviation, when people talk about a runway, they are usually talking about a company’s financial runway. How much cash is in the bank divided by your “burn rate” (the cash are you burning through each month). Normally measured in months, it represents the time you have before you need to take off, extend your runway, or crash!
In an early-stage startup, you are validating ideas, testing theories, learning, and figuring things out.
For investors participating this early on, it’s high risk, but that’s outweighed by the high returns you can score if you back the right business. It’s high risk because of all these unknowns, and often dollars being spent are called “dumb money” because at this point you don’t know what that money is going to do.
For example, you’re launching a Facebook campaign. At this point you don’t know what a cost-per-click will be, or how many of those clicks will convert to users, and how many users will pay. When you start, you don’t know the ROI of each dollar you spend.
By Series A, money spent should be predominantly “smart money” ie. we know that when we spend A, we get B, and as a result, investment at that stage is to amplify known activities.
For this reason, even knowing your financial runway can be challenging, hence why most advice to startups is to “raise more than you think you need”. You’ll undoubtedly make mistakes, disprove theories, and “waste” some money along the way.
When you’re approaching your financial runway, there’s a few options: extend your runway by either reducing your burn rate or securing more investment. Or you can focus on bringing
in revenue as quickly as possible to offset your burn, and ultimately get to cash-flow positive as soon as possible.
Quentin: This is one of the most important things an investor needs to know before deciding whether to invest in a startup.
Fundraising rounds are often much longer and more time consuming than people think. It’s common for a priced equity round to take up to six months to complete (i.e. from first pitch to when the last dollar hits your account).
While you can sometimes cut this down by using a SAFE or convertible note, they also come with their own complications (an article for another day).
If you start a funding round with less than six months runway, it’s quite likely that an experienced investor won’t be interested. Why? Because they’re not sure that you’ll be solvent by the time the round closes. Additionally, if you can’t effectively manage your cash burn, you probably don’t have the management skills to build a successful business.
There are always special cases, and good investors will seek to understand the true situation, but your financial runway is a key metric for assessing a startup’s potential.
Sarah: It makes logical sense that when investing in a company, you’d want to get as much of the company for your investment as possible.
So it’s interesting when you hear about VC’s not wanting to take too much equity. This is advice founders often receive: “don’t give up too much equity”.
In the early days, you’re desperate to keep the business going, and to have a chance. You believe in the potential, but bringing people along on your journey can be challenging. You’d prefer to give up half the company than not have the chance to get it off the ground.
But startups are hard. As a founder, you are devoted to your startup but you often get no or minimal salary, so there’s a significant opportunity cost not taking a larger salary elsewhere.
You have to live lean (and when, like me, you’re approaching your 40s and your friends are financially secure, it can mean a fair amount of FOMO) and you have to give it your all!
If you give away too much equity, it can start to feel like you’re giving too much compared to the other owners of the company, and you can become a flight risk.
As a founder, you have to find a balance of being generous with your equity to give yourself a proper runway and chance of success, with managing your equity runway to take future investments until you can get to a point that you’ll be profitable…without losing so much that you’re less invested.
Quentin: Just like cash in the bank, a startup has a finite amount of equity that the founders can sell before they become minority shareholders.
While consistently increasing your valuation can slow this burn and increase your runway, it’s not something that you can always rely on. If you’re going to be a successful VC funded company, you need to leave room for new investors in later fundraising rounds.
Professional investors know this, and when they see a company that has been heavily diluted by friends and family or angel rounds, it’s a red flag.
Unfortunately, new investors often neglect the equity runway of a startup when they invest.
This can negatively impact both the startup and their investors. Making sure the startup is still attractive to later investors is the dual responsibility of founders and investors. If you’re greedy early on, and dilute the founders too much, you’re just hurting yourself in the end.
As Rayn Ong often says, investors need to be “long-term greedy”, so play the long game and everyone will win.
Sarah: To reiterate, startups are HARD. You are (relatively) poor, you spend a lot of your time doing things you’re not good at, and you can’t take a break when you need to.
It’s long hours, and constant problems. Particularly at the start, you are initiating everything, so being proactive is your job. Over time, you have a team, and you have momentum that really helps keep you going.
But those early stages are particularly exhausting. On top of that, you’re often cutting corners and taking the cheaper options to save on costs.
For example, “we’ll take the non-managed service option and I’ll figure it out”, or, “I’ll hire the more junior person and mentor and train them”, which means that you’re absorbing the difference.
Quentin: I see this from the founder and investor perspective.
When someone invests in a new startup, they’re largely investing in the team and not the product. Startups are a team sport. If a team member doesn’t have the emotional reserves to make it through the challenges, then it will impact the startup’s success.
As Sarah mentioned above, startups are really hard. Like anything hard and worth doing, the process will wear you down. If you don’t have the strength or energy going into the process, or you let the ups and downs impact you too much along the way, you might run out of emotional capital before you reach your goal.
Speaking with founders who have shut down startups, running out of money was usually the deciding factor, but they also mention the mental and emotional toll of running a startup. As their financial runway shrunk, so did their emotional runway, and it eventually sapped their will to continue.
Investors also need to be mindful of managing the ups and downs of investing. The highs are high (eg big exits) and the lows are low (eg cash vaporising shut downs). Get too emotional, lose perspective, and you’ll be quickly wondering why you entered the game at all.
This can lead to a negative spiral where you lose the passion for investing.
Great founders don’t seek out passionless investors to be on their cap table.
Sarah: I’ve never been an investor, so from our (the entrepreneur) point of view, my job is to show investors the potential of my idea.
Investors in this early stage understand that the chance of success is low, and so they only want to invest in an idea where the potential upside is huge. If you can’t show that you could be generating $100m in revenue by year five (the magic number to be on track to be a billion dollar company aka “a tech unicorn”), then you’re not that interesting.
Because, not only do you need to provide a substantial RO(their)I, but it also needs to cover all their investments that never took flight.
So while we’re pitching the value of our idea, they’re also mentally calculating what they’d have left if a bigger, better idea presents itself in the future.
Quentin: This is a classic trap for new investors. Just like founders starting a new business, new investors are very enthusiastic. They love every idea and want to invest in every great team they meet. If you’re a recently minted billionaire, no problem, but a lot of angel investors are not billionaires. Angels are often high net worths or smaller family offices that have / had a successful business and now want to invest some of those profits into startups. This means that they have a finite amount of capital to invest, especially if they are managing a diversified portfolio where alternatives form a small proportion of the overall portfolio.
Just like a startup with a high burn rate, if you invest in too many startups too early, you’re going to run out of runway. This means that you’re going to miss new opportunities and/or be unable to follow on in your successful portfolio companies.
It’s important for investors to know and manage their capital runway so they can evaluate whether a new investment justifies the capital spend. As part of this process, it’s useful for new investors to set a fixed amount and timespan for investing their capital so they know how much runway they have. As John Davis at the Harvard Business School says about family businesses, “structure is your friend”, and it’s the same for investors.
- Quentin Wallace is co-founder of Archangel Ventures and a senior technology lawyer with extensive experience building and scaling startups. Quentin was previously general counsel at Culture Amp and managed and closed its Series B, C and D fundraising rounds, which raised over US$65 million. He also co-founded a startup for creatives to share projects and credit their collaborators. Archangel Ventures is a early stage investment syndicate that makes it easy for high net worths and family offices to invest in Australia’s best startups.
- Sarah Neill has more than 15 years driving marketing and innovation for major consumer technology brands across in-house and agency settings in the USA, UK and Australia and has held senior leadership roles at mobile disruptors Boost Mobile and Mint Mobile. She left Ultra Mobile to return to Sydney and build Mys Tyler, a young, venture-backed, startup disrupting the world of fashion, with a mission to help women feel more confident in the clothes they wear. You can find the free Mys Tyler app in Google Play and the App Store.