We recently published a report on Radicle‘s outstanding data analysis of thousands of funding rounds aimed at determining how much dilution entrepreneurs should allow for at each stage. Another incredibly useful bit of research by Radicle looked at runway length between Funding Rounds.
Investopedia defines ‘runway’ as “the amount of time the company has before it runs out of money.” In the Venture Capital world, this often translates to the time interval within one funding round and the next one.
This is because many start-ups resort to equity funding to fuel growth before they turn any profit at all. In certain fields such as pharmaceuticals, which require large investments of time and money into R&D, are in dire need of Venture Capital money as they won’t be turning any revenues until their products are fully tested.
Raising funds is not an easy task, and it involves a lot of planning and budgeting. Because of this, it is vital to know how much runway a company should target in between two consecutive funding rounds. This helps to avoid running out of money before new funding is secured, or signing a term sheet from an investor that is not ideal just because of the time pressure.
A simple Google Search will show you that the most common answer to the runway question is “between 12 and 18 months”. The likes of Y Combinator and CBInsights, along with several entrepreneurs-turned-gurus over the internet seem to agree with the “one-year-to-one-year-and-a-half” rule of thumb. Of course, there are exceptions: investor Fred Wilson advises for at least 18 months of runway, and Silicon Valley VC firm Andreessen-Horowitz also recommends “plenty of cushion” when estimating runway.
But what does the data say?
Radicle data scientist Sebastian Quintero looked into the matter by mining data from the Crunchbase database. He collected a total of 13,916 consecutive rounds, categorising them as Seed, Series A, B, C, D and E.
He used a statistical technique known as Kernel Density Estimation to build a model that describes how the probability of raising the next funding round is distributed over time. In order to account for structural differences between earlier and later-stage rounds, he used 5 distinct samples (Seed to Series A, Series a to B, etc.) We highly recommend reading the statistical bit in his own words, but trust us when we say that the samples were collected and analysed in an effort to avoid any kind of bias.
Quintero’s findings are summarised in the graphs above and below, respectively showing the means and the medians of the time intervals between funding rounds, for each financing stage.
The piece of data that caught our eye was how close together these values are, regardless of the company’s development stage, with a possible exception for the interval between Seed and Series A, which seems to be slightly shorter than in subsequent rounds.
According to Quintero, a mean of ~20 months with a standard deviation of ~15 months tell us that most fundraising events are separated by a time interval between 5 and 35 months.
Another perhaps surprising finding is the so-called “long tail” of the density distribution function estimated. While some might expect a more symmetrical bell-shaped graph, Quintero’s curve is visibly skewed to the right. In such instances, statistics say that medians are more reliable than averages, as the latter are more sensitive to outliers (recommended reading: “When Bill Gates Walks Into A Bar“).
Let’s examine the chart above in more detail. The median interval between rounds is at its lowest between the Seed and Series A Rounds: 15 months. While this datapoint seems to validate the “12 to 18 months” conventional wisdom, intervals get substantially longer between subsequent rounds: 17 months between Series A and B, 19 between Series B and C and between C and D, and finally 18 months between Series D and E.
The overall median interval is exactly 18 months between each funding round.
It is also worth noting that curves get more “spread out” for later-stage rounds, seemingly indicating that start-ups raising their series D or E can afford to raise finance on their own schedule, rather than being dependent on their runway to avoid running out of cash. At least that should be the case.
The most important finding of this data analysis is that the rule of thumb of allowing up to a year and a half of runway before the next funding round is not valid advice. At least, not always.
Fred Wilson’s advice of preparing for at least 18 months seems to be the most reliable, as it reflects what most financing rounds look like (statistics reminder: median is the point separating the bottom and top halves of a sample).
One key aspect to keep in mind when planning for your next funding round, is that raising funds takes time, sometimes a lot of it. Regardless of statistics, you should allow for a few months to get in touch with enough investors to find the right match, and then some more to negotiate a fair term sheet. As a Founder, it would be nice to find some time to run your business as well in the meantime. All of that adds up to quite some time.
Something we often recommend to Founders worried about running out of cash before being able to raise another round is to look for alternative funding options. These could be grants like the ones from Innovate UK, or advantageous loans such as those offered by the Government with the Start-Up Loan Scheme. You can find most of these through our partner Swoop‘s matchmaking engine. Alternative, as we previously reported, a new category of private non-dilutive financing companies are stepping up to fill the gap left by the flaws of the Venture Capital model.