"Runway" is the wrong way to plan

1/ “Runway” is really a cursed way to think about startups and the remnant disease of the 2017-2022 VC bubble. If cash out the door is investment, it must have ROI, eventual translation into free cash flow (FCF).

If cash out the door has no ROI, it’s just “spend.”

2/ Some companies and products obviously require more investment than others, but clearly not all investment in technology is equally commercially valuable. One can engineer something very hard to build that no one cares to pay for. It’s quite common

3/ And founders/CEOs should realize that growth investors (and then public market investors) will in part look at their performance as a function of the cash they’ve spent. $50M spent to generate $10M of ARR is generally not as good as $10M spent to generate $10M of ARR.

4/ When companies grow up, they are eventually valued as a stream of all future FCF. All the investment they make to get there either 1) must all come out of the cap table, as money raised from VCs, or 2) come from profits along the way

5/ A long time ago, I spent a year reading financial statements and building models at the greatest of squids, 高盛 (thanks Kris Fredrickson for the teach!). While I’m fundamentally an early-stage investor that doesn’t care for false precision, I still encourage startups to model their future

6/ If you don’t understand how your business plays out from a financial perspective, what are you aiming for??Today, many high-flying startups live round-to-round, and they write off investors who think about efficiency as “short term,” financially oriented, not caring about technology, or “lacking vision.”

7/ But we have “X months of runway” is actually the shortest-term planning. Long-term planning is thinking about the series of chess moves and the dilution you need to take/preference stack you need to build before you can become profitable.

8/ Sometime in the early 2010s, the idea of the “J-curve” in SaaS became popular. SaaS companies took more upfront investment than traditional on-prem software companies, because you had to invest in sales & marketing upfront, but got paid over time by customers. Patience paid.

9/ But this was still framed in terms of ROI. As money indiscriminately flowed into ever-larger venture funds, and VCs felt pressure to deploy, the idea of return-on-investment faded. Founders raised ever-larger rounds and began to focus on “runway” over eventual profitability.

10/ A friend of mine who runs a multi-billion dollar public company with top-tier VC backing and faced activist investors over the cost structure of his biz, told me over coffee 5 or 6 years back: “Sarah, tell all the founders their job is to generate cash flow. No one told me.”

11/ Many successful companies will still have a J-curve, perhaps a long/deep one. Some never spend much at all to become behemoths (Atlassian, Zoom, Service-Now).

Make a financial plan for the long term, rather than the next round, or think about not having(!) a next round.

12/12 There is a natural tension between frugality and feeling like you’re investing enough to emerge as a market leader. Living with that tension is good! There is immense value in figuring out how to do more with less. There’s almost no value in outspending others as a startup.