18 months of runway: why investors use it as a yardstick

Ask an investor how much a company should raise and a common answer is: enough for about 18 months of runway. It is a rule of thumb, not a law, and plenty of sound raises use a different figure. But it comes up so often that every founder should understand where it comes from and how to test it.

What runway means

Runway is how long your business can keep going on the cash it has, before it needs more. The simple version is:

Runway in months = cash in the bank ÷ net monthly burn

Net monthly burn is what you spend each month, minus what comes in. If you spend £100,000 a month and receive £40,000 in revenue, your net burn is £60,000. With £600,000 in the bank, your runway is ten months. (These figures are illustrative.)

Why 18 months?

The number is not arbitrary. It comes from adding up three periods most companies need to cover between one raise and the next:

1. Time to hit the milestones. The money you raise should take you to a point where the business is clearly more valuable: a product launched, revenue proven, a key contract signed. That usually takes a year or so.
2. Time to raise again. A raise rarely closes quickly. From preparing documents to money in the bank, several months is normal, and longer is common.
3. A buffer. Things slip. Hiring takes longer, customers pay late, markets cool. Without a margin, a small delay becomes a crisis.

Add those together and you land somewhere around 18 months. Less than that and you may be raising again before you have anything new to show. Far more and you may be selling more of the company than you need to, at today’s lower price.

Why investors care

A company with a short runway negotiates from weakness. Investors know that if cash runs low before the next round, the founders will have to accept worse terms or face closure. A healthy runway protects their investment as much as yours.

It also tells them you have thought about the next round, not just this one. That is a sign of a team that plans ahead.

How to calculate yours properly

The simple formula is a starting point. A realistic runway needs a little more care:

• Use future burn, not today’s. If the raise pays for new hires, your burn will rise. Model it month by month.
• Be cautious on revenue. Use a version of your forecast you would be comfortable defending, not the best case.
• Include one-off costs. Legal fees for the raise, equipment, deposits and annual licences all come out of the same pot.
• Check the timing of cash, not just the totals. A large invoice paid in ninety days does not help next month.
• Include debt payments. Coupons and repayments on loan notes or loans are part of your outgoings. If repayment falls inside the runway period, plan for it now. See planning loan note repayment.

When the rule does not fit

Eighteen months is a yardstick, not a target to hit at any cost. Some situations call for something different:

• A business close to profitability may need less, because it will soon stop burning cash altogether.
• A company with long development cycles, such as hardware or life sciences, may need considerably more.
• A bridge round, raised to reach a specific near-term event, is deliberately shorter.

The point is to be able to explain your number. If you are raising for twelve months, say why twelve is enough and what happens at month twelve.

Your next step

Build a month-by-month cash forecast for the next two years, including the raise. Mark the month cash would run out under a cautious case. If that month is well short of 18, either raise more, spend less, or be ready to explain clearly why a shorter runway is the right call.

This article is general information, not financial, legal or tax advice. If you are planning a raise, talk to BDM Capital.

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