Software Growth

Default alive

A startup is default alive if, at its current burn and growth, it reaches profitability before the money runs out. Otherwise it is default dead.

Paul Graham introduced the idea in his essay "Default Alive or Default Dead?". A company is default alive if it will become profitable before it runs out of money without raising more, assuming its current expenses and growth rate hold. If not, it is default dead and survives only if something changes, usually a new round of funding.

Graham's point is that most founders do not know which category they are in, and that it is among the most important things to know. He suggests the question becomes relevant after the first eight or nine months.

How to test it

Runway alone is not enough because it assumes flat revenue. Default alive projects both revenue and costs forward and asks where they cross.

Example: your costs are fixed at $12,000 per month. MRR is $6,000 and grows 10% per month. You have $60,000 in the bank.

Revenue passes $12,000 when 6,000 × 1.1n is at least 12,000, which means 1.1n is at least 2. That first happens in month 8 (6,000 × 1.18 is about $12,860). Before that you lose money each month, and the total shortfall over months 0 to 7 is:

You have $60,000, so you are default alive. If growth slowed to 3% a month, revenue would take about 24 months to reach $12,000, and you would be default dead on the same cash.

Why it matters

Graham describes a "fatal pinch": a company that is default dead, growing slowly, and left with too little time to fix either one. He also names overhiring as a top killer of funded startups. Founders raise money, hire in the belief that hiring speeds growth, and then burn cash without growth to show for it. As an alternative he cites Airbnb, which after raising delayed hiring for about four months to focus on improving the product.

Ways to become default alive

  • Cut spending, especially hires that do not produce revenue yet.
  • Increase growth, which usually means a better product or better pricing.
  • Raise prices to improve contribution and shorten the time to break-even.
  • Reach ramen profitability.

Cautions

  • Projecting a growth rate for years is optimistic. Use the slowest rate you have actually seen.
  • Check burn after planned hires, not before.
  • Churn counts. Use net growth, not gross new revenue.

For bootstrapped founders, default alive is the normal operating condition, and the question shifts to whether you can afford to reinvest.

Sources

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