Entrepreneurship.

Default Alive or Default Dead

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The question

Take the cash sitting in your account today, everything that actually left it last month, and the rate your revenue has genuinely grown over the past six months — does that reach profitability before it reaches zero? Every figure the sum needs is already in your accounts. Not knowing is a decision, not a gap in the data.

The idea

In October 2015 Paul Graham, who co-founded Y Combinator and had by then watched a great many startups run out of money, published an essay with a question in the title: Default Alive or Default Dead? The sum behind it is simple enough to do standing up. Hold expenses where they are, let revenue keep growing at the rate it has actually been growing, and see whether the line crosses into profit before the bank balance hits zero. If it does, you're default alive. If it doesn't, you're default dead, and your survival depends on somebody else's decision. You've drawn a crossing point before: break-even asked at what volume a bet stops losing money. This one asks whether that volume arrives before the cash runs out, so it needs two things break-even never had — a growth rate and a calendar. It isn't a forecast either. Expenses never hold still, and the answer changes the morning you hire, which is the point; it's a reading of the machine exactly as it stands. Graham's finding was that founders frequently didn't know which one they were, and that nobody had thought to ask. Default dead makes every hire a decision to raise money, and every month of delay a decision the calendar takes on your behalf. Default alive turns fundraising into a choice rather than a rescue — which is also, as any investor works out inside a meeting, what makes it easy.

The framework

01
The sum takes ten minutes, and every input is already in your accounts.
Take four numbers. Cash in the bank today. Your true monthly operating expenses, averaged over the last three months of money actually leaving the account, annual bills included. Your revenue this month. Your monthly revenue growth rate over the last six months, compounded rather than eyeballed. Then hold expenses flat, grow revenue forward at that rate, and find two dates: the month revenue first exceeds expenses, and the month the cash runs out. Whichever comes first is your answer. Use expenses, not net burn — netting revenue off once and then growing it again counts it twice, and that error only ever runs one way, towards flattering you.
02
Would your next hire make you more alive, or less?
This is where the question earns its keep. A hire adds cost from their first payslip and revenue, if it comes at all, several months later, so the honest way to evaluate one is to run the sum twice — once with the person and once without — and watch what happens to the crossing point. Sometimes the hire pulls profitability closer, because they sell or build the thing that grows revenue. More often they simply drag the zero date forward and quietly convert a default alive company into a default dead one. Neither outcome is wrong in itself. What's indefensible is deciding without looking.
03
The three levers, in the order they actually move.
Only three things change the answer, and they don't respond at the same speed. Growth rate is the most powerful and by far the slowest — nothing you do this week will visibly bend six months of trend. Spending is the fastest and the most genuinely yours, which is why a default dead company should look there first and look honestly, founders' own salaries included. Cash is the third, and it's the only one of the three that needs somebody else to say yes, which is precisely why it's a poor thing to be depending on.
04
The zero date belongs somewhere you'll see it every day.
Write the month your cash runs out at the top of the operating page, and move it whenever the numbers underneath it move. Then use it. Founders carrying a date negotiate differently, hire differently and start raising earlier, because a date is something you can count backwards from and a feeling isn't. Six months before zero you have a fundraise, and enough room to walk away from bad terms. Six weeks before, you have a fire sale, and everyone across the table can see it. The date's real job isn't accuracy; it's telling you how much leverage you still hold and how long you get to keep it.

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