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1、Extending Your RunwayRAVI GUPTA&SONYA HUANG MAY 2022SEQUOIA CONFIDENTIALAgenda1.Runway reality2.How much runway do you need?3.How to extend your runway4.Questions and open discussionThis presentation will cover three main topics:First:What is your runway right now?How should you calculate it?Second:
2、How should you think about how much runway you actually need?Third:How do you actually extend your runway if you need more?Our point of view is that most founders need more than they think they do right now.One caveat:These are general principles.If you need more tactical advice specifically tailore
3、d to your company,your Sequoia board member and your community of founders are ready to help.Runway RealityCash balance monthly burnWHAT IS RUNWAY?First,the basics:What is runway?Its your cash balance divided by your monthly burn.If you have$10M in cash and$0.5M in burn,you have 20 months of runway.
4、Cash balance monthly burnWHAT IS RUNWAY?NET cash(cash-debt)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 youve drawn.If you have$10M in cash but youve drawn$5M in venture debt,you
5、really have$5M of net cash and you should use that number to think about your runway.We often get asked why.The reason is that debt is borrowed money.Its 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 t
6、hink about your companys cash position the same way.We could dedicate an entire session to the tradeoffs of venture debt.The TLDR is that having a line is a helpful lifeline when youre facing a cash crunch,but drawing it comes at a cost.It makes it harder to raise your next round.It comes with coven
7、ants that means debt holders can own more and more of your company.It can be a negative signal,and it can generate a lot of overhang.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 dont draw on
8、 it unless absolutely necessary,with eyes wide open to the tradeoffs.Cash balance monthly burnWHAT IS RUNWAY?Operating FCF=EBITDA-Interest-Taxes-FCF-CapexNET cash(cash-debt)Monthly burnthis is different from your net income.Net income is an accounting concept.Burn is literally cash in minus cash out
9、.It takes into account things that arent 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 contractsall of these things impact your cash burn.Its critical to have a very tight grip
10、on what your cash burn is.There may be ways to reduce the gap between EBIT and free cash flowmaybe 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 youre purchasing
11、 inventory,its existentially important to have a very detailed understanding of your expected cash outlays.If youre not careful in managing and forecasting around these outlier expenses,then your runway can turn out to be 3 months when you thought it was 15.Runway is not staticBUTOne more thing:Runw
12、ay is not static.Just because you have 8 years of runway doesnt mean you can forget about it and assume youre 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 watc
13、hing that number religiously.SEQUOIA CONFIDENTIALA Mental Framework:Runway vs MilestonesNOWTHEN$0$0How might this look in practice?Suppose you and your CFO put your heads together,and your best guess for how cash changes over time looks something like this chart.SEQUOIA CONFIDENTIALA Mental Framewor
14、k:Runway vs MilestonesNOWTHEN$0$012 MONTHS PRIORTime to raise!This is your cash-out point.12 months before that,its time to think about raising again.SEQUOIA CONFIDENTIALA Mental Framework:Runway vs MilestonesNOWTHEN$0$0FUNDAMENTALS12 MONTHS PRIORTime to raise!Runway doesnt come in a vacuum.Its inti
15、mately tied to meeting valuation milestones.Imagine youre 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 its going to last you until you reach the next gas station.Think about what your goal is for your next fundrai
16、sing.Maybe its an up round.Maybe its a flat round.Maybe its a down round.Maybe its to reach 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“fundamen
17、tals”get to you to your goal.Maybe its ARR.Maybe its Gross Profit.This is the green line on this chart.SEQUOIA CONFIDENTIALA Mental Framework:Runway vs MilestonesNOWTHEN$0$0FUNDAMENTALSSolid before cash runs out 12 MONTHS PRIORTime to raise!Hope for the bestPlan for the worstThe rough mental framewo
18、rk 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.Theres a delicate balance in your scenario analysis between investing in growth and burning cash in order to make sure that you ar
19、e leaving enough runway to meet the next milestone.Its important to hope for the best but plan for the worst as you are plotting out how to make the math work.SEQUOIA CONFIDENTIALStory is not enough to raise your next roundStoryMetricsFinancialsValuationGreat BusinessThe financial reward for buildin
20、g a Great BusinessRaising your next round on pure story is not enough anymore.That worked when capital was plenty,but investors are now going to care about your metrics,and more importantly your financials.So its important to make sure that you are focused on getting that valuation milestone to the
21、right place.SEQUOIA CONFIDENTIAL3 Runway Buckets1312 MONTHSBUT NOT ENOUGH TO REACH VALUATION MILESTONEENOUGH FOR NEXT ROUND2Existential to focus on this or youre goneCritically important tofocus on runwayStay the course andcontinuously optimizeNow,youve done the exercise of figuring out your runway
22、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 runway2.Bucket 2:12 months of runway but not enough to raise a flat round based on rational metrics:Here its critically i
23、mportant to focus on 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 today are in Bucket 1.A few are in Bucket 3.But many are in Bucket 2.If we can emphasize one point in this presentation its this:man
24、y founders may think theyre in Bucket 3,but are actually in Bucket 2.The financials that you have to reach in order 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,its critica
25、lly important to focus on managing runway,even if you have years of runway remaining.Next,well cover how to extend your runway.How to extend your runwayIf you take us at our word that we all probably need more runway than we thought,the question is:How do you get it?SEQUOIA CONFIDENTIALHow to reduce
26、 burn and extend runway1.Understand where you are2.Lay out the potential changes based on burn impact and ease of execution3.Set a goal 4.Execute on this goalLike many things in business,its very easy to say and its very hard to do.SEQUOIA CONFIDENTIAL1.Understand where you areUnderstand where the m
27、oney goes in your P&L-Where does your net loss come from?-Break it into smaller and smaller partsDo the same exercise for cash items that dont show up on the P&LUnderstand what spend is efficient vs inefficientThe first step in getting very tactical is to understand your current state.This means loo
28、king deeply into your P&L.If youre talking about runway,that means youre losing money every month.So you have to figure out where the net loss comes from.Once youve identified the specific places in your P&L causing your burn,you can start thinking about which dollars yield efficient growth and whic
29、h are not as helpful.SEQUOIA CONFIDENTIAL2.Break it into component partsNet lossGross marginOpexTo understand which parts of your P&L need to be addressed,begin with the big picture and break it down into component parts.Starting with net loss,you can break that into two component parts:gross margin
30、 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 b
31、reaking it down until you have a detailed view of the components that contribute to total net loss.SEQUOIA CONFIDENTIAL3.Lay out the potential changes you could make based on potential burn impact and ease of executionHigh impactHard to executeHigh impactEasy to ExecuteLow impactHard to executeLow i
32、mpactEasy to ExecuteEASE OF EXECUTIONIMPACTOnce youve identified the important contributions to your burn,you can plot them in terms of their burn impact on the y-axis.Then theres ease of execution:how easy is it to address and how big an impact doe it have?Unfortunately,youre not likely to find man
33、y items that are high impact and easy to execute.Changes that extend your runway a lot will almost certainly be difficult.This plot is important because it will set your roadmap for the actions you take to extend your runway.SEQUOIA CONFIDENTIAL4.Set a goalYour goal Extending runway from current lev
34、els to a level where you can reach a rational milestone(flat round fundraise,up round or cash flow positive)Once you understand the levers available to impact runway,you can use them to set a goal.Your goal should be oriented around how long its going to take for you to reach a rational milestone.Le
35、ts say your goal is a flat round.Given the market conditions,for many of us thats going to take us three years.To unpack why that is:Say you hypothetically raised your last round at a billion dollars,and you have five to 10 million of ARR.We think that if you want to raise your next round at a billi
36、on dollars,you might need 75 to 100 million of ARR,which might mean you need to grow about 10 to 15X.It takes time to do that.It very well might take three or four years.SEQUOIA CONFIDENTIAL4.Set a goal(Your goal)+12If it takes three years,we recommend you have four years of runway.The reason:as men
37、tioned earlier in the presentation,you want to raise 12 months before running out of money.Generally investors view it as a bad sign to have a very short runway,so you want to avoid being in this situation when raising a round.So the time you need to hit your goal plus 12 months is the ideal runway
38、that we would suggest.One recommendation:When you decide how long it will take to reach your goal,be very realistic.Use public comps and ask the toughest board member.Ask her what it will take to reach a flat round based on rational milestones,and then add 12 months.SEQUOIA CONFIDENTIAL5.Execute on
39、this goalIts going to be hardPeople-related cutsPricing increasesIt gets betterIncreased ownership and motivationSales efficiencyExtended runwaySo now youve taken the steps to understand where you are,and youve broken down your P&L to understand where the money goes.Youve plotted your options in ter
40、ms of ease-to-execute versus burn impact.And youve set a goal based on rational milestones.So lets say hypothetically you need to cut your burn from$3 million a month to$2 million.We dont want to sugarcoat this:Its going to be hard.Of course a people-related cut is the hardest decision any leader ma
41、kes.Beyond this,you may face many challenging and nuanced decisions:If youre a global company,you might need to reevaluate certain markets.If youre a company thats relied on a marketing or sales investment in order to grow,you might have to reevaluate your strategy.You might have to increase pricing
42、.This is scary,especially if you dont have time to fully test the value proposition.REMEMBER:You will be better on the other side.The big thing to remember is this:If you take the steps necessary to extend your runway in line with rational milestones,we are confident you and your whole company will
43、be better on the other side.SEQUOIA CONFIDENTIALKey TakeawaysYou need a lot more runway than you thinkYou are what your P&L says you are-you need real metrics to raise your next roundFigure out your bucket,most of you are in bucket 2Its time to execute-take the steps to reduce burn and extend your r
44、unway!To conclude with a few key messages:You likely need more runway than you think.Ultimately,your next round will be based on your metrics,which is going to be reflected in your financials.Be real about what bucket youre in.We think most companies are in Bucket 2,which is more than 12 months of cash,but needing to make some changes.You have what you need to win.You have the ability to execute and were here to help you in doing that.