For years I thought that entrepreneurs should plan for two years of personal runway to have sufficient time to iterate on an idea and get to break even. Looking back on it, I was wrong. After starting a few companies and investing in several more, I now believe entrepreneurs should plan for three years of financial runway.
Here are a few reasons why entrepreneurs should plan for three years:
- Pardot took three years and Hannon Hill took four years to clear $1 million in revenue ($1 million is a great milestone for sustainability as well as the ability to pay a decent salary for the founders)
- Almost all successful companies go through at least one pivot (see examples)
- Finding product/market fit often takes 1-2 years and building a repeatable customer acquisition process often takes 1-2 years, making the prospects of solid revenue in less than three years unlikely (see the 4 Stages of a B2B Startup)
So, when thinking about taking the entrepreneurial plunge, budget for three years of personal runway. Building the base of a successful business is a long, hard process.
What else? What are your thoughts on planning for three years of personal runway?
6 thoughts on “Plan for Three Years of Personal Runway”
Don’t forget to budget for the downside. The startup may never reach $1m. You need a to budget personally for what you might so next.
In BtB startup companie remember your offering is not in any potential clients budget no matter how good a fit it is. Plan for at least two or three years sales cycle to gain trust and available budget to sell into.
I don’t think having three years of runway is realistic for most people. Based on that logic, unless you are independently wealthy or someone is willing to fund your “ideas”, you have no business trying to do a start up.
Most investors laugh at your “ideas” and only become interested once they see an opportunity to scale an already proven business. Without product/market fit and a repeatable sales process, all you have is an “idea” or a “hobby” or at best a “lifestyle business”.
I didn’t even quit my day job until we had our first real customer. Now we’ve been live for almost a year, full-time for 6 months, are on $1m+ run rate for 2014, been making payroll for two months, and continue to acquire new customers weekly. For us it was either strike lightning fast and get revenue or have the company die a quick (and humiliating) death.
Is it really reasonable to tell a potential entrepreneur that they need to have their finances planned for the next three years before attempting a start-up? I don’t think so.
Concerning the importance of pivots, Steve Blank recently discussed a study that misued and so misdefined the concept of a pivot. Most $1B companies indeed pivoted one way or the other. Preparing for this in a 3 year personal runway definitely makes sense!
Thanks David for sharing your reflections on your business heuristics!
While I agree that several years of runway is the smart move, I think it is too much to ask for most people building companies. Outside of people from wealthy families or entrepreneurs with past successes/exits, it is unlikely that they will have that much cushion.
I would argue that some of the best entrepreneurs aren’t those with several years of runway, but those with little to none. The best motivator is survival and that is the daily fight for anyone starting a company with nothing to fall back on.
Other solutions exist today for founders (especially young founders) to survive while they are building their business:
1. The movement towards collaborative consumption has empowered many entrepreneurs to make a small wage on the side. I know many founders who are working on their startup full time and driving for Uber/Lyft at night, selling products on Gumroad, or teaching online courses on Skillshare and other platforms. While these revenue streams are not sustainable long term, they can reduce the upfront runway and subsidize the time with no income.
2. Also, many great companies were started as side projects while the founders were still working full time at other companies. The time will come when they are forced to choose, but it can often buy the founders an extra 6-12 months of runway.
I fully agree that several years of runway would be ideal, but personal runway is just one of the countless obstacles a founder will fight through. I know it’s possible because I made it through myself. I had about 6-12 months runway when I started my company right out of school. The first several months seemed impossible with little to no income, but it forced me to learn how to sell/build a company. Necessity is the greatest motivator.
Thanks for the interesting post David, would love to hear what you think.
I think this is a great article and totally realistic. In order to build my own startup company, I basically took 3 years moonlighting before I had the team and experience to even start my own company (which thankfully was successful). That’s why there are so few successful founders in the world. The other option is to make sure your spouse is totally supportive both emotionally and financially – which means he/she works equally hard in a high-paying and stable job. Yes – that’s a lot to ask for, but this is the real world.