What Does Default Alive Mean?

A startup is default alive if it will reach profitability before its money runs out, assuming nothing changes. Expenses stay where they are, revenue keeps growing at its recent pace, and nobody writes another check. If the company still gets to break-even with cash left, it's default alive. If the cash hits zero first, it's default dead.

The term comes from Paul Graham, co-founder of Y Combinator, in an October 2015 essay called Default Alive or Default Dead?. His wording of the test is plain: assuming expenses remain constant and revenue growth is what it has been over the last several months, does the company make it to profitability on the money it has left? He adds that the surprising part is how often founders themselves don't know the answer.

Default Alive vs Default Dead

The question is a fork. Graham says that if a company is default alive, you can talk about ambitious new things it could do. If it's default dead, you need to talk about how to save it, because the current trajectory ends badly.

The word "default" matters. It means the path the company is on today, with no heroic changes. Default dead isn't a verdict that the company will die. It says that if nothing changes, it will, and that's information a founder can act on.

How to Calculate It

You need four inputs from your own books:

1. Cash in the bank. What you have today.
2. Monthly expenses. Held flat for the test. Hiring plans tend to sneak in here.
3. Current monthly revenue. The most recent month.
4. Recent monthly growth rate. Growth over the last several months, not the best month.

The steps:

1. Project revenue forward month by month at the recent growth rate.
2. Subtract flat expenses from each month's projected revenue. The result is that month's profit or loss.
3. Find the month where revenue first covers expenses. That's break-even.
4. Add up the losses before that month. That's the cash you'll burn to get there.
5. Compare that total with your cash. If cash is larger, you're default alive.

Trevor Blackwell built a calculator that does this arithmetic, and Graham links to it from the essay for founders who want to check their status.

A Worked Example (Illustrative)

The figures here are illustrative, not real data. Take a made-up software company with $400,000 in the bank, flat expenses of $50,000 a month and current revenue of $20,000 a month. Everything else is held constant. Only the growth rate changes.

Scenario A: revenue grows 10% a month.

Revenue hits $50,000 when 20,000 x 1.10^n reaches 50,000, which takes about 10 months. Monthly losses shrink from roughly $28,000 in month one to under $3,000 in month nine, and add up to about $151,000. The company breaks even in month 10 with roughly $249,000 still in the bank. It's default alive.

Scenario B: revenue grows 3% a month.

The same math says break-even takes about 31 months. But cumulative losses pass $400,000 around month 17. The cash is gone 14 months before the company would have turned profitable. It's default dead.

Same company, same bank balance, same costs. A change in growth rate flips the verdict. The test turns on growth more than on cash.

The Fatal Pinch

Graham's warning is about timing. He defines a "fatal pinch" as default dead + slow growth + not enough time to fix it, and he says founders end up there by not realizing that's where they're heading.

Each part makes the others worse. A company with 18 months of runway and a bad trajectory can redesign its product. One with three months can mostly cut costs and hope.

His practical advice is to ask the question early. Graham writes that it's not very dangerous to start worrying too early that you're default dead, but very dangerous to start worrying too late. He also suggests separating fact from hope: say "we're default dead, but we're counting on investors to save us" and see whether the sentence sets off an alarm.

How It Relates to Other Metrics

Default alive sits on top of simpler numbers, and it's worth knowing which is which.

• Burn rate is how fast cash leaves each month. Net burn is expenses minus revenue. In the worked example, net burn starts at $30,000 and falls every month in scenario A.
• Runway is how many months the cash lasts at the current net burn. It's a snapshot that assumes burn stays the same. Default alive is more forgiving, because it lets revenue growth shrink the burn over time. A company can have short runway and still be default alive if growth is steep.
• Break-even point is where revenue equals costs. Default alive is a claim that you'll reach it first.
• Burn multiple compares cash burned with new revenue added. It shows how efficiently a company buys growth, which tells you how plausible your growth assumption is.

Growth vs Profitability

Graham links the question to fundraising. He observes that investor interest tends to be a function of growth, and that steep revenue growth, such as over 5x a year, can let you count on investors even without profit. But he adds that investors are fickle, so fundraising should never be more than a plan A. Founders should also have a plan B, written down, with a date on which they'd switch to it.

This is the same tension covered in growth vs profitability. Default alive doesn't say profit beats growth. It says growth should be a choice made from a position of safety, not a hope you can't survive without. A default-alive company that raises money is buying speed. A default-dead one that raises money is buying time, and may need another round later. See Series A, B and C funding and bridge rounds, which default-dead companies often chase.

Graham's own prescription for avoiding default dead is blunt: don't hire too fast, which he calls by far the biggest killer of startups that raise money. He points to Airbnb, which waited four months after raising at the end of Y Combinator before its first hire.

Limits of the Assumption

The test is a stress check, not a forecast. Several things can break it.

• Growth rarely stays constant. Early revenue growth often slows as the base gets larger. A fair version of the test uses a lower rate than the recent peak.
• Flat expenses are unrealistic. Companies add staff, tools and insurance. If costs rise, break-even moves out. Recalculate when plans change.
• Revenue isn't cash. Annual contracts paid upfront, late-paying customers and refunds all move cash around. Use cash receipts where they differ from booked revenue.
• Gross margin matters. If each dollar of revenue carries its own costs, break-even sits further out. Check gross margin before trusting the projection.

For these reasons, run the test with two or three growth rates, one optimistic, one realistic and one pessimistic, and note which ones come out alive.

Common Mistakes

• Using the best month's growth. Use a multi-month average.
• Counting the next round as revenue. If the answer is yes only because a raise is expected, the company is default dead, and Graham says to say so out loud.
• Letting expenses drift up in the model. Flat means flat. If you plan to hire, treat that as a separate scenario.
• Ignoring timing. Being default dead with 20 months left is fixable. With 3 months left, it's a valley of death situation.

Key Facts

• Default alive is the idea that, if expenses stay constant and revenue grows at its recent rate, a startup reaches profitability on the money it has left. Paul Graham introduced it in October 2015 (Paul Graham).
• Graham defines the fatal pinch as default dead plus slow growth plus not enough time to fix it (Paul Graham).
• He reported that about half the founders he talked to didn't know whether they were default alive or default dead (Paul Graham).
• Graham says that revenue growth of more than 5x a year may let a founder count on investor interest even without profit, but that fundraising should never be more than a plan A (Paul Graham).
• The essay links a calculator built by Trevor Blackwell for checking default status (Paul Graham, calculator).

Related Reading

• Burn Rate
• Runway
• Burn Multiple
• Growth vs Profitability
• Bridge Round