Default Alive or Default Dead?

October 2015

When I talk to a startup that's been operating for more than 8 or
9 months, the first thing I want to know is almost always the same.
Assuming their expenses remain constant and their revenue growth
is what it has been over the last several months, do they make it to
profitability on the money they have left? Or to put it more
dramatically, by default do they live or die?

The startling thing is how often the founders themselves don't know.
Half the founders I talk to don't know whether they're default alive
or default dead.

If you're among that number, Trevor Blackwell has made a handy
calculator you can use to find out.

The reason I want to know first whether a startup is default alive
or default dead is that the rest of the conversation depends on the
answer. If the company is default alive, we can talk about ambitious
new things they could do. If it's default dead, we probably need
to talk about how to save it. We know the current trajectory ends
badly. How can they get off that trajectory?

Why do so few founders know whether they're default alive or default
dead? Mainly, I think, because they're not used to asking that.
It's not a question that makes sense to ask early on, any more than
it makes sense to ask a 3 year old how he plans to support
himself. But as the company grows older, the question switches from
meaningless to critical. That kind of switch often takes people
by surprise.

I propose the following solution: instead of starting to ask too
late whether you're default alive or default dead, start asking too
early. It's hard to say precisely when the question switches
polarity. But it's probably not that dangerous to start worrying
too early that you're default dead, whereas it's very dangerous to
start worrying too late.

The reason is a phenomenon I wrote about earlier: the
fatal pinch.
The fatal pinch is default dead + slow growth + not enough
time to fix it. And the way founders end up in it is by not realizing
that's where they're headed.

There is another reason founders don't ask themselves whether they're
default alive or default dead: they assume it will be easy to raise
more money. But that assumption is often false, and worse still, the
more you depend on it, the falser it becomes.

Maybe it will help to separate facts from hopes. Instead of thinking
of the future with vague optimism, explicitly separate the components.
Say "We're default dead, but we're counting on investors to save
us." Maybe as you say that, it will set off the same alarms in your
head that it does in mine. And if you set off the alarms sufficiently
early, you may be able to avoid the fatal pinch.

It would be safe to be default dead if you could count on investors
saving you. As a rule their interest is a function of
growth. If you have steep revenue growth, say over 5x a year, you
can start to count on investors being interested even if you're not
profitable.
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