For Entrepreneuers – 1 Year of Runway Helps (If You Can Get It)

I’m about a year into life as a first-time co-founder of a traditional product-oriented tech company. I’ve done two other services companies, but product companies are different. The one interesting thing about starting a product company is that you will get a wealth of advice from other people. Most of it centers around hiring the right team, building the right product, and making sure there’s a market for what you’re developing. As I talked to more entrepreneurs who had built larger, successful companies, there was one piece of information I regularly received and was not inclined to believe until very recently:

If you are going to do a product-oriented tech startup, it really helps to have at least 12 months of financial runway to cover your expenses and some investment in your ideas before you get started.

I have found it odd that of the many startup articles I’ve read, very few seem to hit on this point. It’s kind of an awkward thing to say – it’s not as if you can’t do a startup without 12 months of runway. And to be clear, there are a number of ways to have at least 12 months of runway, including some of the following:

-Savings and liquid investments
-Family wealthy
-Proceeds from previous successful ventures
-A spouse or a partner with a stable job that covers your expenses as a couple
-A low-cost, low-burn lifestyle
-You’re in school and someone else is paying your overhead and expenses

I had to hear the point about 12 months of runway from a few folks before I believed it. I think that I, like many others, had the same core reaction when presented with that piece of advice:

1. My ideas are good – it won’t take me 12 months to find a high quality idea to pursue. I found it hard to believe that it would take 12 months to find a good idea. After all, most people who decide to start companies tend to believe that a) they are above average and b) have the ability to spot really good opportunities. How could it take a whole year to find a good idea? Well, you have to think about the process. I can almost guarantee that your first idea will not be what you end up pursuing. I was told this by numerous folks, didn’t believe it, and it turned out to be true. More importantly, you’ll have many ideas that die at different points. Some will get killed at the concept stage. Some will only get abandoned after you prototype them. Others will make it all of the way to public launch before you decide they’re not worth pursuing. The point is that failure takes time and some of the things you ultimately abandon have to get pretty darned close to being live before you realize they won’t work or you’re not that into them. Even if you can get to a working, interesting product in less than 12 months, budgeting for a year gives you plenty of time to get there.

2. The idea of saving or otherwise acquiring 12 months of personal burn is kind of daunting. When you sit down and budget what you need for a year, the number can be daunting. How do you come up with that kind of cash if you don’t have it? It’s hard. But going through the exercise is really useful. It might turn out that you can only scrape together 6 months of cash. Knowing that is useful – it helps you understand how far you can go and the types of ideas you can pursue before you raise money or seek other types of financing. Whether you need 6, 12, or 18 months of financing, the process of going through a budgeting exercise is really useful and helps sharpen the mind around what you can achieve.

So why does all of this matter? Well, raising money provides you with funds to grow but also comes with a ton of expectations about what you will achieve. A lot of starting up is thrashing about and trying to figure out what it is that you want to build and how you’ll spend money to achieve that goal. Money spent prior to figuring out some sense of product market fit, market size, and growth plan comes at a very high price in normal markets. To the degree that you can figure out the basics on your own (and your co-founders) dime(s), the better the odds that you’ll be able to raise money at a time when you’ve figured out what it is that you’re trying to do and how you’ll spend the money.

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  • http://www.marketing-startups.com Conrad Egusa

    Great post Charles. You are definitely right about the need for runway.

  • Paul Nash

    Yes and No. I’ve been part of a pile of startups, and those that flopped most dismally were the ones with money. The most successful started with a bank balance of $0 — we had to pay the incorporation with my (already overstretched) Visa card. Having to keep things going kept us exceptionally focussed, so that we could eke out an existence somehow. As a result, we gave the customers what they wanted, changed our product plans based on what they were prepared to pay for, and ended up selling the company for about $20M.nnThe biggest disaster was well-funded, so we spent 18 months building the “perfect” product (technically) which our target market admired but would not buy. After about $2M of the founders’ money, we shut up shop and crawled away licking our wounds.nnYour mileage may, of course, vary. Mine has :-)

  • http://www.charleshudson.net chudson

    Paul,nnI am not actually sure I disagree with you. I think the point of having enough money to cover 1 year until you figure out a product is a good thing to do, but having too much money almost always causes problems, especially if it comes before you’ve figured out what it is that you’re building. Enough money to cover rent, some basic expenses, and pay some contractors / employees along the way is a help. Also, bootstrapping yourself off of 1 year’s worth of money does keep you focused on where the dollars are going. nnThe other nice thing about keeping the focus on having 1 year of burn is that you (hopefully) don’t end up sinking so much time and money into the product before you learn whether or not there is a there there.nnThanks for the insightful anecdotes.

  • http://twitter.com/kowboykoder Cowboy Coder

    It’s also very helpful to move to a low rent low crime part of the country, money lasts longer that way. Most engineers with decent enough skills to start out or their own are making $90-$130k. Plenty of Americans get by fine on $20-30k salaries. This means that even a couple years of saving from a corporate job can give you $100-$150k, enough funding to last 5 years or more with little income in the midwest. That’s enough time to build a big category killer. Or less risky, enough time to bring up a new product from version 0 to 1 to 2, while building sales, acquiring product reviews, and establishing a customer base who buys upgrades, all up to the point where you are doing quite well, which won’t usually be the case after the first year and the version 1 has just been released.

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  • Elizabeth

    Great post, Charles. This is not talked about nearly enough.

  • http://currentlyobsessed.com/ joe heitzeberg

    Great post! You’re right that this is an important but aften ignored topic.nnI would caution people against leaving their job to find an idea. The best way to extend runway is to delay quitting your full time paying job as long as possible, and work nights and weekends to find and validate a direction.nnHeck, you still might be better off taking 50% of your salary and hiring people to help you on the side than to cut off 100% of your income suddenly. nnReady to quit? How about instead negotiating a deal with your employer to work part time at reduced pay, giving you more time to pursue the startup and giving you infinite runway. Most employers (if you’re any good) would much prefer a part time arrangement (at least for a few months) than to lose you altogether.nnObviously if you’re going to pursue a startup while employed elsewhere, check the terms of your employment contract and even consider getting your day job to acknowledge it, otherwise if there’s any lingering doubts about your IP ownership, you may be unable to get institutional financing later on.

  • http://www.charleshudson.net chudson

    Joe,nnThanks for the great comment – I think there are lots of ways to create runway and you’ve identified quite a few good ones here.nnCharles

  • Anonymous

    Good lesson here is to not let having money change the way you would have built a product otherwise. Money shouldn’t get in the way of agility, iterative design, and proving the product’s value day-after-day. As an engineer / product guy, I definitely understand the appeal of wanting to build the sexiest, most perfect product. It’s a tough challenge for folks like me, wanting to be just as proud of my balance sheet as I am of what’s on the screen.