Are you Default Alive or Default Dead? Have you thought about it?
This depends on your current expenses, growth rate, and cash on hand. If your business is on the right trajectory to reach profitability before running out of money, then you’re Default Alive. If not, then you are Default Dead.
The only way to navigate the long road ahead is to keep an eye on the map before you miss your turn. And the best way to accomplish this is by starting each day with a simple question:
Am I Default Alive or Default Dead?
Once you're profitable, you control your destiny: you can raise more to grow faster if you want. Or stay bootstrapped. It does not matter what you choose, but your business will survive.
With the current recession hitting, there is no doubt that your business vitals will be changing frequently. That’s ok, and quite honestly, expected. But what’s not ok is using this frequent change as an excuse to not keep track of your metrics and have the right conversations.
Default Dead, default Alive was first introduced by Paul Graham yet it is very little known. It is an amazing concept to help you have the right conversations NOW.
Even when you know this concept, it is hard to model out that many parameters in your head. There are so many moving pieces: sign-up, activation and conversion rate, churn rate, costs, etc.
The elasticity of this model is counterintuitive. For instance, your current MRR matters a lot less than you think! However, the growth rate of your revenue is insanely important.
That's why you need a robust yet simple model.
Great news, I have one for you. Here is a calculator to find out if you are default alive or dead with your current metrics:
This tool calculates how much funding your startup needs. Assuming your expenses are constant and your revenue is growing, it shows when you'll reach profitability and how much capital you'll burn through before then.
Its creator describes it best:
“You can drag the red or green handles to set expense, revenue, and growth. Geometrically, the capital needed is the blue-shaded area between the revenue and expense curves.”
Once you know if you are default alive or default dead, adapt your conversation with your founding team:
- Default alive: talk about new ideas and growth strategies
- Default dead: talk about how to avoid certain death
As a founder I have a look at the data with Ferruccio every two weeks to make sure everything is in control.
Hope this helps as much as it did for us!