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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.  But investors are so fickle that
you can never do more than start to count on them. Sometimes something about
your business will spook investors even if your growth is great. So no matter
how good your growth is, you can never safely treat fundraising as more than a
plan A. You should always have a plan B as well: you should know (as in write
down) precisely what you'll need to do to survive if you can't raise more
money, and precisely when you'll have to switch to plan B if plan A isn't
working.  
  
In any case, growing fast versus operating cheaply is far from the sharp
dichotomy many founders assume it to be. In practice there is surprisingly
little connection between how much a startup spends and how fast it grows.
When a startup grows fast, it's usually because the product hits a nerve, in
the sense of hitting some big need straight on. When a startup spends a lot,
it's usually because the product is expensive to develop or sell, or simply
because they're wasteful.  
  
If you're paying attention, you'll be asking at this point not just how to
avoid the fatal pinch, but how to avoid being default dead. That one is easy:
don't hire too fast. Hiring too fast is by far the biggest killer of startups
that raise money.   
  
Founders tell themselves they need to hire in order to grow. But most err on
the side of overestimating this need rather than underestimating it. Why?
Partly because there's so much work to do. Naive founders think that if they
can just hire enough people, it will all get done. Partly because successful
startups have lots of employees, so it seems like that's what one does in
order to be successful. In fact the large staffs of successful startups are
probably more the effect of growth than the cause. And partly because when
founders have slow growth they don't want to face what is usually the real
reason: the product is not appealing enough.  
  
Plus founders who've just raised money are often encouraged to overhire by the
VCs who funded them. Kill-or-cure strategies are optimal for VCs because
they're protected by the portfolio effect. VCs want to blow you up, in one
sense of the phrase or the other. But as a founder your incentives are
different. You want above all to survive.   
  
Here's a common way startups die. They make something moderately appealing and
have decent initial growth. They raise their first round fairly easily,
because the founders seem smart and the idea sounds plausible. But because the
product is only moderately appealing, growth is ok but not great. The founders
convince themselves that hiring a bunch of people is the way to boost growth.
Their investors agree. But (because the product is only moderately appealing)
the growth never comes. Now they're rapidly running out of runway. They hope
further investment will save them. But because they have high expenses and
slow growth, they're now unappealing to investors. They're unable to raise
more, and the company dies.  
  
What the company should have done is address the fundamental problem: that the
product is only moderately appealing. Hiring people is rarely the way to fix
that. More often than not it makes it harder. At this early stage, the product
needs to evolve more than to be "built out," and that's usually easier with
fewer people.   
  
Asking whether you're default alive or default dead may save you from this.
Maybe the alarm bells it sets off will counteract the forces that push you to
overhire. Instead you'll be compelled to seek growth in other ways. For
example, by _doing things that don't scale_, or by redesigning the product in
the way only founders can. And for many if not most startups, these paths to
growth will be the ones that actually work.  
  
Airbnb waited 4 months after raising money at the end of Y Combinator before
they hired their first employee. In the meantime the founders were terribly
overworked. But they were overworked evolving Airbnb into the astonishingly
successful organism it is now.  
  
  
  
  
  
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