Always have 18 months of cash in the bank

I was once told by an experienced entrepreneur (I can’t remember who) to always have at least 18 months of cash in the bank. The logic behind this is: 1) as a rule of thumb it takes 3 months to raise money, 2) building/marketing/selling technology always takes longer than you think.  Subtracting 3 months for fundraising and 3 months for things taking longer than expected, this gives you 12 months to execute your plan. (Also you never want to raise money “with your back against the wall” – when you are near the end of your runway.)

More adventurous entrepreneurs might argue 18 months is too conservative. It’s true that following the 18 month rule can be extra dilutive. At SiteAdvisor, we raised our Series A about three months before we were acquired. So we gave up equity for cash that we never spent. But in retrospect, given what we knew at the time, I think it was the right decision.

The question of when to raise money is one of the few times that entrepreneurs and early-stage investors have somewhat divergent economic interests. If you control a large investment fund, you always have the option to extend a company’s runway. The entrepreneur doesn’t have this option. I’ve even heard some entrepreneurs whisper about Machiavellian VCs who deliberately try to get you to the end of your runway so they can negotiate harder. I think this is a bit of a conspiracy theory. Almost all VCs I know care primarily about the success of their companies and not about extracting every last point of equity.

8 thoughts on “Always have 18 months of cash in the bank

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