There is something that any startup that has been in existence for close to a year should know. Assume that your spending remains the same and the rate of growth of your revenue is the same as it’s been over the last few months. Can you generate a profit with the funds you currently have? Or will you run out of funds before your business becomes profitable? By default, does your startup live or does it die? It may sound more than a little dramatic, but the term, coined by Paul Graham, founder of Y-combinator is one every startup should take seriously because it will determine what their next move will be. Not surprisingly, most startup founders don’t know the term, talk more of using it.
Y Combinator founder and partner Trevor Blackwell created the growth calculator and fellow cofounder Paul Graham says it provides scary, but important answers about whether a startup is on the right course or not. The reason for knowing first whether a startup is default alive or default dead, like I mentioned before is that it will determine the next move of the founders. If the company is default alive, they can pursue ambitious new things they could do. If it’s default dead, then they need to plan how to save it. They know their current path ends in the death of the startup. How can they get off that trajectory?
And if you are default dead?
This is more than just a bit of arithmetic. Make a graph of your monthly spending and revenue over time, and find the point where they intersect and you become cash flow positive. The amount of money that’s between now and that point is the amount you need to secure in funding. And until you can get that funding, you’ll need to concentrate on growing revenue and keeping your operation running on the cheap. By carefully monitoring this graph, a default dead company can track its performance on a month-to-month basis and react to negative changes, such as an extension in the amount of time it would take to breakeven.
One reason why founders don’t know if they are default alive or default dead is that they feel their startup is too young for them to start asking. The startup will grow, however and the answer to the question becomes critical to the startup’s life. This change often happens suddenly and takes founders by surprise. Worrying too early that your business is default dead is not a harmful thing, but it’s dangerous when you start worrying too late.
Being default dead could still not be fatal to your startup. That is, if you are sure of investor support. Investors are mostly interested in revenue growth of any company asking for their money. If your revenue growth rate is high, then you can count on investors bailing you out before your startup runs out of money and folds. Keep iin mind, however that nothing is a given and you can never truly be sure of investor support until they sign that cheque – and it clears. So while you have investors as your main plan, it would be wise to have a contingency plan in case investors don’t come through.