Time to Market

Time to Market S01 E06 – How to Think About Your Startup's Runway

Startups always face the challenge of limited financial resources, and extending their runway (the amount of time they can operate before running out of funds) becomes crucial for their survival and growth.

Sean K. Murphy: I'll tell you what I'd like to talk about today. Etienne, you wrote a great article on 14 Ways B2B Entrepreneurs Can Extend Their Startup Runway to Go the Distance. There's a lot to unpack. It's a long article, about 2,000 words.
So if you want to stop here and read the article first, that's okay. What I like about it is you've given a lot of thought to possible options and come up with 14 that cover a broad spectrum of approaches.
I like the way of organizing the three broad categories. The first is using personal finances, savings, credits, and bank loans. The second is using revenue to extend your runway, which is my favorite. And the third is seeking investors. What led you to write this article?
Étienne Garbugli: So first, thanks for the compliment. That's great. It's great to have people read it.
I wrote for a mix of reasons. One, I was getting questions from entrepreneurs. Some people are focused on either getting investment or they're not sure exactly how to keep going, how they can buy themselves a little bit more time with their startups. Two, creating a comparison guide would help them assess their options--and let them realize that there are more options than they were initially considering.
When I look at successful startups, many succeeded in part because they worked on a problem for a long time, often longer than their competitors. So, just buying yourself more at-bats and more time is a good way to put yourself in a position to find product/market fit, build a sustainable business, and get to the next milestones.
Sean K. Murphy: That’s someone speaking from experience. It always takes longer than you think, so if you can find ways to persist, you have more chances to put what you have learned to use. Extending your runway to give more time to find product/market fit is a challenge that first-time entrepreneurs don't always appreciate until it's perhaps too late.
Étienne Garbugli: I characterize the quest for product/market fit as research and development. A lot of research is needed, and you cannot be sure when it will pay off. You cannot be sure that you will actually find product/market fit and be able to build a business.
Since time to product/market fit is a variable you can't predict or plan for, then at any given time, it makes sense to pick the best path forward based on what you know. Your time and other resources are always limited, so you must continually assess your options for finding product/market fit.
Sean K. Murphy: If I put my bootstrapper hat on for a minute, I like that you identified five potential revenue sources. The first is keeping your day job, which is underappreciated.
The second is consulting or freelancing. Third is your suggestion for creating add-on products like books, e-articles, and courses. Fourth is microtasks, where you design logos, do user tests, or translate content. And then finally, finding ways to pre-sell or otherwise accelerate the revenue. That's an excellent mix of strategies: most entrepreneurs will only consider a few of the five.
You mentioned one advantage of consulting or freelancing is you can solve the same problems that your product will solve. You use a term I hadn't heard before, client-strapping, where you establish a business relationship by solving a particular set of problems for a client first as a service and then transitioning to a product.
You've done this personally with two startups. What advice do you have for entrepreneurs considering this path?
Étienne Garbugli: Part of the issue is that if you're starting to do work that has no relationship with your startup's work, you need to split your focus.
This means that your attention is going in different directions. You're not thinking about the same problem space all day and not interacting with the same kind of stakeholders. So some of your time may feel wasted or only yielding revenue and not the insights that move you close to product/market fit.
There's value in generating revenue, but it's better to combine that with learning more about your customers or the problem you want to solve for them. I have always tried to be fairly strategic about how I built products to create a sustainable business: I wanted everything targeting the same type of customer.
If your consulting serves different customers than your product will, then you need to chase two sets of customers, which also has a context switch cost. If you can focus on just one type of customer, it's much better.
For example, you can write a book for the same audience you want to serve with your consulting and your product is intended for. Or you can blog on Substack or develop a digital product for your target customers. These generate some income but are also a way to learn more about your customers and their needs. This is a double win because you fund the business and have conversations with target customers.
Sean K. Murphy: I've met entrepreneurs who were consulting using a technology they were planning to use as part of their product offering. Sometimes, they aim at one set of customers and a different set for the product.
They were gaining fluency with the technology. It's hard to avoid some split in your focus. Still, I like your idea of keeping things aligned as you progress from building an audience to offering a service to providing a product. The more you can keep the team aligned in the same direction, on the same problem, for the same customer, the better. You may need to do many things to serve your target customer or solve their problem, but the fewer changes, the better.
Étienne Garbugli: It’s something entrepreneurs tend to neglect. Almost any way you will fund your business will be, to some level, distracting. Whether you're raising outside capital, like that will take time, that will mean you'll need to build relationships, you'll need to find the right people to fund your business, you need to go through a bunch of meetings, and a bunch of interactions that might not feel like actual progress for your business.
Building something else first that you need to sell has risk, and some might view it as waste. I think it depends upon the circumstances. as well. I agree with your earlier point that the ideal in B2B is to fund the business from sales because that approach has a certain amount of validation built in, and it helps you focus on your core goal immediately.
It may not be possible depending on your situation, so you may need to adapt your approach. There's your goal, your plan for achieving it, and what you can accomplish right now.
Sean K. Murphy: One confusion or miscalculation that technical entrepreneurs can fall prey to is equating "people who are using my application" with "people who are getting value out of it." They track proxy variables like downloads, logins, time spent in the application, or the exercise of one or more key features.
The team has to measure and ensure the customer gets value if they hope to get paid and see renewals. The customer normally gets value by using the output from your tool somewhere else in their business.
I like your idea of a team using the tool to sell the customer the result because it helps them concentrate on what the customer is willing to pay for. I see entrepreneurs confuse the customer paying for their product with paying for the results they can achieve. Have you seen this?
Étienne Garbugli: Sometimes it's called a concierge MVP. You assume the risk of using your product and just sell the result. This is high touch or more involved than normal customer support but it’s often a better initial approach before you put out a full solution. You can figure out where the weak points are, the customer experiences fewer problems because you absorb many of them and can address them internally, and you get paid for specific outcomes.
It's a good way to refine your understanding of customer needs and expectations. An initial product sale may not be enough of a sign that you are headed in the right direction: what you described the product would do and what they understood it would do did not match.
Many things can go wrong because your understanding of their needs was incomplete, so that what you deliver does not meet their expectations. The concierge or service-first MVP allows you to have more detailed discussions about the results customers want without having to explain in parallel how to use the product. You can concentrate on satisfying their specific needs.
Sean K. Murphy: One approach to pre-selling is to keep your product behind your back and use it to provide you with advantages providing a service.
In the article you identify a half dozen options for outside funding: friends and family, Angels, VC, bootstrapper-friendly funding that is cash flow based, grants and contests, and equity crowdfunding.
That's a full list, but after you mention friends and family for completeness you rule it out. Most entrepreneurs rely on those same people for emotional support, and most friends and family members are not prepared to lose their entire investment in the same way that angels or VCs are. How would you prioritize the remaining options?
Étienne Garbugli: Being held accountable to an external entity, even friends and family, is valuable. There's something to be said for agreeing on stage gates, achievements or results you mut demonstrate before you take more funds--or perhaps invest more of your own time and money in your current approach. They prevent you from burning through your savings and theirs without getting results.
Sean K. Murphy: I agree, I have met a few entrepreneurs who used “exhausting their life savings” as a stopping rule to bad effect.
Étienne Garbugli: The last decade has seen some new vehicles that are interesting for entrepreneurs. For example, if you're starting to have some revenue in the company, services like Founderpath or Pipe will use your recurring revenue to assess how much money to loan you. Clearbanc has variations on this as well.
There are also more founder-friendly funds like TinySeed and Calm who are not trying to get 100x on their investments. The ambitions of your funding sources will determine the amount and type of pressure you will have to achieve certain goals in your startup.
I recently spoke with an entrepreneur targeting a particular acquirer. He understood the valuation they typically paid. That valuation meant he had to rule out traditional VCs because their expectations for return on the investment would mean that he would need to go in a different direction and change the nature of his company.
So their exit plan conflicted with a traditional VC game plan. It's important to understand how these different decisions interact with what you are trying to achieve with your company. Early funding decisions can have long term impacts you need to anticipate.
Sean K. Murphy: Revenue-based financing is a good choice for startups with recurring revenue. I have talked to two other investors in the space: Lighter Capital and Indie VC.
All these investors who offer revenue-based financing have a cut-and-dried approach to evaluating the funding. So you can normally get a decision very fast once you disclose your financials and customer agreements: don't ask questions or express opinions about your strategy. It's “show us the revenue and proof of recurring revenue relationships with your customers” and get a decision. It’s a different and perhaps more pleasant than the traditional VC gauntlet.
One quick thought on spouses and significant others. In two cases where an entrepreneur had effectively defined personal bankruptcy as their stopping rule, it was their spouse who saved them by refusing to allow them to take out a second mortgage or cash in their retirement accounts
You have to treat them as board members from the beginning. Building on your point about the value of accountability and defined accomplishments stage gates, you need to lay out your plan and hold yourself accountable to them on a periodic schedule. They are more than a passenger in your race car. You can get a lot of support if you are candid from the beginning.
Étienne Garbugli: That's a great idea.
I have been reading your book, "Working Capital: Assembling Your Team” and your suggestion to build an advisory board, at least an informal one, that allows you to get different perspectives and an independent objective reading on your situation. Building in that objective review, especially early on, is a good way to avoid fooling yourself.

It is so easy to convince yourself that prospects telling you they like what you built or investors sounding excited in a meeting are reasons to double down on what you already believe and are doing. You don’t need to change anything, it’s all going to work out.

I've seen this quite a lot. Some people have in the plan for their life doing a startup as an objective. So they save up for six years and start with $250,000. But now they are burning cash while trying to figure out their model and end up losing all their stake before figuring it out.

There are ways to be more capital effective; at a minimum you should have some by having more stage gates or checkpoints you have to pass before spending more. Take a page from established corporate innovation models and identify the key metrics or achievements you need to hit before moving to the next step keeps you focused on the right problems to solve. This same kind of mechanism also makes sense on the personal side: I've seen too many entrepreneurs burn their savings with little to show for it.

Sean K. Murphy: Two strategies you touch on for extending your runway in the article are figuring your model before you quit your day job, and freelancing or consulting while you refine your model so that you slow your burn way down. We agree you should not go “all in” until you have the basics figured out, but what do you see entrepreneurs—who are now split between two worlds—do to maintain focus?
Étienne Garbugli: I used to think I would get more results by completely focusing on the startup from the beginning. But especially in the early stages, the reality is that you can do many things that you feel you should do because you are now in a startup, but they don't move the needle. Setting limits or constraints force you to be more strategic, think more carefully, and focus on what's critical. It also lowers your blood pressure which is always nice.
Studies have shown that financial pressures change our thinking style, and not for the better. We become anxious, uncomfortable, and more short-term in our approach. Not having some income can degrade our thinking.
I do feel, having a job or keeping some constraints is underrated in some ways, I wouldn't have said that several years ago. But at this point, I do feel that. And I think we talked about it in another episode to some extent, I think we need to view this more as a career as opposed to one specific effort.
I wouldn't have said this several years ago, but having a job or keeping some constraints is underrated. Also--and we discussed this in an earlier episode--you should view entrepreneurship as a career, not a single effort or project.
I find the language problematic when someone says, "I am starting a startup." You are now committed to your idea: you have launched your boat and left the harbor. That commitment changes the way that you think, but it's premature. If, instead, you say you are fiddling around or exploring the market, you lower your emotional attachment to what you're working on. This detachment is especially useful when it's likely you will need to pump the brakes or change direction.
Sean K. Murphy: So, I've gone through "keeping your day job," and I realized that you do have to commit to entrepreneurship but view your current employer as an investor. You also have to let go of your career at that company. This does not mean you do a bad job, but you figure out what you must do to be adequate or acceptable. You still need to be helpful to your team members and meet your obligations, but your "something extra" is now allocated to becoming an entrepreneur, not your next promotion.
When you talk about stage gates, there's something about the last minute, the pressure, that unlocks a certain amount of creativity, right?
There's this great quote from Calvin and Hobbes by Bill Watterson. Calvin says, "You can't turn creativity on like a faucet; it takes last-minute panic." By creating these small deadlines, you're more likely to break yourself out of self-imposed constraints than if you give yourself 18 months until your next milestone.
I watched several people leave Cisco with their stock gains and start a company. If they planned their next milestone 18 months out, they didn't begin to make hard decisions about trade-offs until month 16 or 17. And they weren't well served by that delay.
Étienne Garbugli: So when would you suggest that entrepreneurs start thinking about their runway, or start thinking in terms of runway?
Sean K. Murphy: Well, I think the second time you do a startup you think about the runway before you start. Unless the first one was a success or you are a slow learner,.
The first time you're optimistic: "This is going to be great!" Sometimes it is. But a lot gets left out of most founder success stories. They can find it difficult to recapture and express their confusion and uncertainty. It's easy to gloss over setbacks, and unless they have a good reason to share their real mistakes, which are often related to unrealistic mindsets and miscalculations, you get a watered-down and misleading version of events. We've been fortunate to have some candid conversations at the Bootstrappers Breakfasts, but we don't record and publish them, which makes it easier for them to be shared in a small roundtable conversation in a back room at a coffee shop.
If you listen to successful serial entrepreneurs, they often–to borrow a phrase from Stephen Covey–" begin with the end in mind." It's not necessarily an exit but more often product/market fit or break-even cash flow. From there, they know who their paying customers will be, and they have an opportunity to explore for scale.
Étienne Garbugli: I agree that it can be hard to hear the real stories, but I am reminded of the observation that good entrepreneurs learn from their mistakes, but great entrepreneurs learn from others' mistakes.
Hopefully, this conversation spurs entrepreneurs in our audience to think about their runway now instead of a little further out or too late. Too late can cause structural challenges. For example, if you plan to bootstrap but proceed without working out the details, you may suddenly discover you need to raise capital. It's quite likely that your unit economics, strategy, or business model structure don't make your business investor friendly.
So it's difficult to make these changes without incurring what I call a "learning tax." Even if you have a year left and realize that your runway needs to be longer, you will need time to pivot to a different strategy. If you had been managing your runway from the start with milestones, it might have been easier, or at least less stressful, to find the right direction.
Sean K. Murphy: Research by the Kauffman foundation has uncovered two two peaks of entrepreneurship: the twenties and the forties. What I see a the Bootstrapper Breakfast is that entrepreneurs do startups in their teens through their sixties. But the entrepreneurs under 30 tend to view it as more of an adventure.
Older entrepreneurs don't look at it as an adventure. They look at it as a career decision. Because they know that once you go “free range” by leaving regular employment, mentally it’s hard to go back, and it’s also hard for an employer to view you as a viable candidate for regular employment. They are pretty sure you don’t want to get back in a cube.
It’s not that older entrepreneurs are afraid of failing but they are more mindful of failure as a possibility and more proactive in trying to avoid it. I think they are also more careful about making–and meeting–commitments. Because they know many of the people they are talking to when they are soliciting input and making sales calls. Or they have called in favors from friends to get introduced.
So they are not making commitments to strangers they will never see again, or they are involving members of their network, at least indirectly by virtue of the introductions, in their commitments. That creates a very different level of risk or cost for failing to meet a commitment and makes them more prudent, or at least more cautious, about making commitments they don’t keep.
Étienne Garbugli: These are good insights. So let me ask you a question, what do you do when a founder or founding team comes to you and says, “We only have eight months of runway left, what do you suggest we do?”//
Sean K. Murphy: I advise them to “Sell what you have.”
If they've been working at it for a while, I encourage them to go back and look at what's worked that they can build on. They may have practical insights or expertise that can form the basis for information products or consulting services that will get them to break even.
It is often the case that after they describe their plans for a full product to a prospect, the prospect will say, “if you could deliver just this piece, I would pay for it.” Often multiple prospects ask for the same piece or small subset of features,, but the team does not want to get sidetracked from implementing the whole vision that energized them and brought them together.
So they have ignored what the market told them: it would pay for. Then the crunch hits, and successful teams are willing to get good at the "smaller thing" and make enough money to break even.
Étienne Garbugli: Which is a good way to fund your business so that you can gradually implement your original vision or one that takes into account what you have learned.
Sean K. Murphy: I tell them they don't have to give up on the vision, but they need to find their way to it in a sequence of small successes. One problem I have seen with seeking funding when you don't have enough practical knowledge of the market is that the investor, who often has less understanding of the market than the team, either tries to imagine what you will need to do to succeed or brings up an unrelated idea that's "hot." You don't learn anything that allows you to build a differentiated product.
If you are chasing revenue, you are getting valuable feedback. Instead of getting opinions from investors about what might work, you're getting feedback from prospects about what they need.
Étienne Garbugli: Conversations with prospects always help accelerate the process–if you listen. The more you put yourself out there, the more likely you are to close a sale, even if it's not exactly what you were hoping to sell initially.
Sean K. Murphy: Right. What rules of thumb for planning have you seen teams follow for success? What do you recommend teams do to stay out of trouble or at least to minimize runway problems?
Étienne Garbugli: One good idea we already touched on in this discussion is to start thinking about how to manage your runway as early as possible. What is your plan today, what are your backup options if your current plan does not work out? Consider different time horizons and prepare some ideas for the alternatives at each stage as you move forward. How about yourself, what would be one takeaway from this discussion?
Sean K. Murphy: There is a principle of military communication planning called PACE that outlines the need for four options: Primary, Alternate, Contingent, and Emergency. Applied to startups your alternate or backup plan should have the potential to be as viable as your primary. Preparing an alternate plan is important because if your primary plan is not working, teams can fall into the false choice of “should I persevere or give up?” And they persist in a plan that’s not working because they don’t want to give up and the financial pressures you mentioned earlier are giving them tunnel vision, they cannot in that moment generate options. So prepare the alternate, and your other two backups at the beginning when everyone is optimistic and not stressed.
You can update any of them as you go but don’t persist in a bad plan because you did not prepare other options in advance and cannot think of any now.
Étienne Garbugli: As the team moves forward and hears these insightful stories from customers, I have found that writing them down is good practice. They can become quite helpful in the future. I remember one conversation where an organization told us they did not need exactly what we were selling, but if we could offer X, Y, or Z, then any of those would be of interest. Keeping track of customer suggestions and observations helps you rework and re-assemble your plan if you need to.
Sean K. Murphy: That's actually a really good suggestion.
Étienne Garbugli: I like to make good suggestions.
Sean K. Murphy: At least once each podcast, you come up with something that stops me for a few seconds, and I say “I should really do that.”
Étienne Garbugli: We’ve talked about the value of writing things down in earlier podcasts. I think it offers some great benefits. It’s easy to forget things if you don’t write them down, and a log or journal makes it much easier to revisit what you have heard periodically.
You can read something a month or a few months later, and it takes on a different meaning now that you have more context. Some things you may have discounted can become more relevant and interesting.
So give me one last takeaway for entrepreneurs on managing their runway.
Sean K. Murphy: Most entrepreneurs are optimists and find it difficult to think about failure–and thinking about it too much can be paralyzing but we need to celebrate constructive pessimism, where the thought of failure helps us to prevent or minimize it. For example, if you want to do a startup but are worried you will fail and be embarrassed, start but keep you day job. Only tell a few people, tell them–as you phrased it earlier–I am exploring, I am fiddling with some ideas.
I think you need to find at least one co-conspirator (a potential cofounder) to share ideas with. But it’s easier to “stay out than get out” so keep you day job and explore in a serious way. You can evaluate and abandon a number of possibilities and say “I am exploring” instead of “I have failed four times.”
Étienne Garbugli: I like your point of view about reframing your job as supporting your new career as an entrepreneur. I think that's good for today. So where can people go to ask us any questions or anything like that?
Sean K. Murphy: On Twitter, you're @leanb2b, and I'm @skmurphy. Yes. And please give us feedback.
Étienne Garbugli: We'll, we'll see you guys in a future episode.

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Related Blog Posts

https://leanb2bbook.com/blog/extend-startup-runway/
https://en.wikipedia.org/wiki/PACE_(communication_methodology)