STARTUPS PULSE - What VCs Really Want to See in Your Runway

PalmPay Secures Series B Funding for Expansion in Africa and Asia Obvio’s stop sign cameras use AI to root out unsafe drivers VC's Are Funding Two Things Right Now What VCs Really Want to See in Your Runway #startups, #venturecapital, #funding, #AI, #Africa, #Asia, #innovation

Episode Transcript

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Welcome to Innovation Pulse, your quick no-nonsense update covering the latest in startups and

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entrepreneurship news.
Pompey is raising $100 million to expand across Africa and Asia.
Obvio secures $22 million for solar traffic cameras and AI and deep tech attract significant
venture capital investment.
After this, we'll dive deep into runway management for startups, exploring how to

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effectively extend your financial horizon and make data-driven decisions for long-term
success.
Pompey, an African digital bank fintech, is in discussions to raise between $50 million
and $100 million in a series B round.
The company, founded in 2019, has become one of the continent's prominent fintechs,

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shy of unicorn status.
Having previously raised nearly $140 million, Pompey is now profitable and aims to use the
new funds to expand in Nigeria, scale its business offerings, and enter new markets in Africa
and Asia.
Pompey offers a digital banking solution optimized for Africa's informal economy, providing

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instant onboarding, zero transfer fees, and services like credit, savings, insurance,
and bill payments.
It combines digital acquisition with a physical network of over one million small businesses
and agents serving more than 10 million customers monthly.
The company processes more transactions than any traditional Nigerian bank, with 25% of

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users opening their first financial account through Pompey.
A strategic partnership with Transian, the largest smartphone seller in Africa, aids
user acquisition by pre-installing Pompey's app on smartphones.
Pompey is expanding to Tanzania and Bangladesh, beginning with device financing and consumer

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credit.
On the business side, it offers cross-border payments for merchants, processing hundreds
of millions of dollars monthly.
Join us as we discuss the innovative approach to enhancing pedestrian safety.
OVO, based in San Carlos, California, is tackling pedestrian safety on American streets by

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installing solar-powered cameras at stop signs to monitor traffic violations.
Founded by Ali Rihan and Dhruv Maheshwari, the startup differentiates itself by focusing
on safety without contributing to mass surveillance.
Unlike controversial license plate reading systems, OVO's cameras process footage locally

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and only transmit data when a violation is detected, which is then reviewed by staff
before being sent to law enforcement.
This ensures minimal data sharing and reduces the potential for misuse.
The startup has raised $22 million in a Series A funding round led by Bain Capital Ventures
to expand its operations beyond the initial five cities in Maryland.

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OVO offers its technology free to municipalities, earning revenue from citations issued for
infractions like speeding and illegal turns.
This business model encourages responsible driving behavior, aiming for community support
and behavior change rather than revenue generation.

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With a focus on transparency and community engagement, OVO aims to improve road safety
while addressing privacy concerns, setting it apart from other traffic monitoring solutions.
The venture capital landscape is currently dominated by investments in AI and deep tech,
with 66% of VC dollars split equally between these two sectors.

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This focus is driven by the rapid scalability and lower cash requirements of AI companies,
alongside the vast potential returns from deep tech innovations.
The remainder of the tech sector has seen a 63% decline in investment from its peak.
AI is exemplified by the meteoric rise of platforms like ChatGPT, which boasts over

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800 million users and nearly $4 billion in annual revenue since 2022.
Companies on the lean AI leaderboard are witnessing staggering revenue growth, with
some reporting 10% weekly increases.
Meanwhile, deep tech has made significant strides with Waymo's self-driving technology

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overtaking traditional ride-sharing giants in San Francisco.
This sector encompasses a wide range of innovations, from rockets and remote data centers, to
advancements in healthcare and environmental solutions.
The lift of traditional funding constraints and the promise of unprecedented returns make

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AI and deep tech attractive to mega funds, further fueling their growth and impact.
And now, pivot our discussion towards the main entrepreneurship topic.
All right, everybody. Welcome to another deep dive on innovation pulse.

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I'm Donna, and as always, I've got my co-host, Jakov Lasker here with me.
Today, we're talking about something that keeps a lot of founders up at night, and honestly,
maybe should be keeping even more of them awake.
Hey there, Donna. Yeah, we're diving into runway management, but not the kind where models strut their stuff.
We're talking about the financial runway that can make or break your startup.

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And here's the kicker. Most founders are thinking about this completely wrong.
Ooh, fighting words right out of the gate. Lay it on me, Jakov. What's the big misconception?
So most people think runway is just this simple math problem, right?
You take your cash balance, divide by your monthly burn. Boom.

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There's your runway. If you've got 10 million in cash and you're burning half a million per month,
congratulations, you've got 20 months of runway.
That sounds reasonable. What's wrong with that calculation?
Well, it's not wrong, but it's incomplete. It's like saying you know how to drive because you can turn the steering wheel.

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First off, you need to be looking at net cash, not just your cash balance.
Net cash. Explain that for our listeners who might not be familiar.
Sure thing. So if you've got 10 million in cash, but you've drawn 5 million in venture debt, you don't really have 10 million.
You've got 5 million of net cash. That debt, it's borrowed money. It's not yours.

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Just like you wouldn't count on a credit card balance as part of your personal net worth.
You shouldn't count debt as part of your company's real cash position.
That makes total sense. It's like the difference between having money in your bank account versus having access to a credit line.
And I'm guessing there are some serious implications when you start drawing on that debt.

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Exactly. Drawing on venture debt can actually make it harder to raise your next round.
It comes with covenants. It can be a negative signal to investors and it creates what we call overhangs.
So here's a pro tip. If you're tied on cash, secure that venture debt line, but don't count it as part of your runway calculation.

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Think of it as emergency money that you really hope you never have to touch.
Right. So it's there as a lifeline, but with eyes wide open about the trade-offs.
Now what about that monthly burn number? I'm assuming that's not as straightforward as it sounds either.
You're getting good at this. Monthly burn is not your net income. Net income is an accounting concept with all sorts of adjustments.

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Burn is much simpler. It's cash in minus cash out. Period.
And why does that distinction matter?
Because there are tons of things that impact your cash burn that don't show up in your monthly profit and loss statement.
If you're buying inventory up front, that's cash out the door.
If you have big capital expenditures, same thing.

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If you're a subscription company collecting yearly contracts up front, that's cash coming in that might not all count as revenue this month.
Oh wow. So your actual cash situation could be dramatically different from what your P&L suggests.
Absolutely. And if you have what we call a lumpy business, meaning you have to put cash up front for inventory or big capital expenditures,

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this becomes existentially important.
I've seen founders think they had 15 months of runway, only to discover they had three months when those big cash outlays hit.
That's terrifying. So you really need to have a detailed understanding of your expected cash outlays, not just your regular monthly expenses.
Exactly. And here's another crucial point. Runway is not static.

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Just because you calculated eight years of runway last month doesn't mean you can forget about it.
As your revenue and expenses change, your runway can change very quickly.
You should be calculating this every single month and watching it religiously.
That's a great segue into something I want to dig into.
A lot of founders think about runway and isolation, but you and I both know it's really about milestones, right?

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You've hit the nail on the head, Donna. Runway doesn't exist in a vacuum.
Think about it like driving on a freeway when you're running out of gas. What matters isn't how many gallons you have.
It's whether that gas will last until you reach the next gas station.
I love that analogy. So what's the gas station in this scenario?
Your next fundraising milestone. Maybe it's an up-round. Maybe it's a flat-round. Maybe it's reaching cash flow positive.

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Whatever your goal is, there's some valuation milestone attached to achieving it.
You need to figure out what metrics or fundamentals get you to that goal.
Maybe it's annual recurring revenue. Maybe it's gross profit.
So you're essentially running two parallel calculations. How long your cash will last versus how long it'll take to hit the metrics you need for your next round.

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Exactly, and there's this delicate balance in your scenario planning between investing in growth and burning cash while making sure you leave enough runway to actually meet that next milestone.
You want to hope for the best, but plan for the worst.
And I'm guessing the days of raising on Pure Story are pretty much over.
You got it. That worked when capital was plenty, but now investors are going to care about your metrics and, more importantly, your financials.

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You need to make sure you're focused on getting those fundamentals to the right place.
Okay, so let's get practical. Once founders have done this exercise of mapping runway against milestones, what are the different scenarios they might find themselves in?
Great question. There are basically three buckets.
Bucket one is less than 12 months of runway. That's existential territory where you need to focus on runway immediately.

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Bucket three is having enough runway to raise a flat round, up round, or reach cash flow positive.
Basically, you can stay the course and continuously optimize.
And I'm sensing there's a bucket two. That's where most people actually are.
Bingo. Bucket two is having 12 months of runway, but not enough to raise a flat round based on rational metrics.

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And here's the key insight. Many founders think they're in bucket three, but are actually in bucket two.
Why is that? What's changed?
The bar has been raised. The financials you need to reach to cover your next round have changed dramatically.
Many companies are three to four years away from reaching their last valuation, with less than that amount of cash remaining.

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Even if you think you have years of runway, if you can't hit the metrics needed for a reasonable round, you're in trouble.
So even if you technically have plenty of cash, you might not have enough time to reach the milestones you need. That's a sobering reality check.
Exactly. Which brings us to the million dollar question. How do you extend your runway if you need to?

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I'm guessing it's easier said than done.
Like most things in business, it's very easy to say and very hard to do. The first step is understanding your current state.
You need to look deeply into your profit and loss statement. If you're talking about runway, that means you're losing money every month, so you have to figure out where that net loss comes from.

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Break that down for us. How granular should founders get?
Start with the big picture and break it down into parts. Your net loss breaks into gross margin and operating expenses. Then break each of those down further.
What drives your gross margin? What about your compensation versus non-compensation expenses? Keep breaking it down until you have a detailed view of every component contributing to your total net loss.

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And then what? Once you've identified all these burn drivers?
Then you plot them on what I like to call the impact versus ease matrix. On one axis, you have the burn impact. How much reducing this expense would extend your runway?
On the other axis, you have ease of execution. How difficult would it be to actually make this change?

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I'm guessing you don't find many items that are both high impact and easy to execute?
Unfortunately, no. Changes that significantly extend your runway are almost certainly going to be difficult. But this exercise gives you a roadmap for the actions you need to take.
And what should founders be aiming for in terms of timeline?
Your goal should be oriented around how long it's going to take to reach a rational milestone. Let's say your goal is a flat round, given current market conditions. For many companies, that's going to take three years.

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Three years? That seems like a long time.
Think about it this way. If you hypothetically raised your last round at a billion dollars and you have 5 to 10 million in annual recurring revenue, you might need 75 to 100 million in ARR to raise your next round at that same valuation.
That means growing 10 to 15 times, which very well might take three or four years.

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So if it takes three years to hit your goal, you'd want four years of runway?
Exactly. The reason is you want to raise 12 months before running out of money. Investors view having a very short runway as a bad sign. So you want to avoid being in that situation when you're fundraising.
That makes sense. And I imagine when founders are setting these timelines, they need to be brutally realistic?

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Absolutely. Use public comparables. Ask your toughest board member what it will really take to reach a flat round based on rational milestones. And then add that 12 month buffer.
Okay, so let's say a founder has done all this analysis and determined they need to cut their burn from 3 million a month to 2 million. What does that actually look like in practice?

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I won't sugarcoat this. It's going to be hard. People related cuts are the hardest decisions any leader makes. Beyond that, you might face many challenging decisions.
If you're a global company, you might need to reevaluate certain markets. If you've relied on marketing or sales investment to grow, you might have to reevaluate your strategy.

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You might even have to increase pricing, which is scary, especially if you don't have time to fully test the value proposition.
Those are some tough choices. Any words of encouragement for founders facing these decisions?
Here's the big thing to remember. If you take the steps necessary to extend your runway in line with rational milestones, you and your whole company will be better on the other side. It's about building a sustainable business, not just extending the inevitable.

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Wow, Yakov, this has been incredibly eye-opening. Let's wrap this up with the key takeaways for our listeners.
Sure thing. First, you likely need more runway than you think. Second, your next round will be based on your metrics, which will be reflected in your financials. Story alone won't cut it anymore.
Third, be real about what bucket you're in. Most companies are in bucket 2, which means they have more than 12 months of cash but still need to make some changes.

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And the final message? You have what you need to win. The tools and frameworks are there. It's about executing with discipline and clear-eyed realism about where you actually stand.
Perfect. Thanks for walking us through this crucial topic, Yakov. For all our listeners out there, whether you're a founder, investor, or just someone fascinated by the startup world, take a hard look at your own situation or the companies you're involved with.

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Are you really in the bucket you think you're in? And remember, this isn't about doom and gloom. It's about making smart, data-driven decisions that set you up for long-term success.
Absolutely. Thanks for tuning in to Innovation Pulse, everybody. Until next time, keep building, keep learning, and keep those runway calculations up to date.

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We've explored Pompey's ambitious expansion plans and Obvio's innovative approach to pedestrian safety, while also diving into the essentials of runway management for startups with Donna and Yakov Lasker.
Don't forget to like, subscribe, and share this episode with your friends and colleagues, so they can also stay updated on the latest news and gain powerful insights. Stay tuned for more updates.