- Today we're gonna talk
about a term that was coined a few years ago,
but it's more relevant than ever before.
Is your startup default alive or default dead?
What does it all mean and how do I find out
if my startup is default alive or default dead?
This is "Raw Startup."
I'm the founder of Vivino,
the world's largest wine app and wine community
with over 60 million users all over the world.
In my career as a founder
I've been both default alive and default dead.
You know, mostly default dead though.
We're also gonna talk about how you move
from default dead to default alive,
should you choose to do so.
It does sound more appealing to be default alive
but there's a catch, so be careful with that.
There's also a big dilemma here where your interests
as a founder may not align with your investors.
More about that later.
With that, let's get started.
The expression was invented by Paul Graham,
co-founder of Y Combinator back in 2015.
I do recommend you read his blog post,
link in the description.
Short and easy to read.
Here is the exact definition from his blog post.
"Assuming their expenses remain constant
and their revenue growth is what it's been
over several months, do they make it to profitability
on the money they have left?
Or to put in more dramatically,
by default do they live or die?"
(sucks teeth) So much drama.
In short, "With the current growth
and without raising any more money,
is the startup alive or dead when the money runs out?"
It's quite a simple concept.
It's not about being profitable or not profitable.
Is it, "Will we make it to profitability
before the money runs out?"
You should always know if you're default alive
or default dead, and it's quite simple to calculate.
Let me show you.
To figure it out you need to know the following:
monthly costs, monthly revenue, revenue growth per month,
and money in the bank.
You can do it per week, per month or quarter.
We'll do it per month.
There's a simple calculator online.
Let's show how that works.
There's a link in the description too.
Okay, let's try an example.
We have a startup that spends 100,000 a month
and they have a revenue of 20,000 per month.
Growth rate is strong. It's 5% per month.
So very far from being profitable,
but they do have 2 million in the bank.
Quick work on the calculator
and it shows it will take 1.6 million to get to break even.
So we have 2 million. We're therefore default alive.
In this case, if we have less than 1.6 million,
we are default (tongue clicks) dead.
If we have more than 1.6 million, we're default alive.
The calculator also shows
that it takes 2.7 years to get to profitability.
Okay, let's look at why this is important.
I know it's a sensitive subject.
It's no fun talking about if your startup is dead or alive,
but you really should know
if your startup is default alive or default dead.
This is important because
what if you can't raise money the next time?
Maybe it's always been easy to raise money,
but things change and things change fast.
Especially right now.
We've seen that in 2022
suddenly everything changed and funding got much harder.
Nothing really changed in your startup,
but the market got harder,
and suddenly it might be hard to raise money at all.
You do not know what the future brings,
and things could change before your next round.
There's one thing you always need.
If you have it, you're fine. If you don't, you're doomed.
That thing is time.
Time is always what you need.
"If you have time, you can change things.
If you don't have time, you're doomed."
You should always know your state
because then you can do something about it,
if you have the time.
Let's say you're default dead,
if you have 12 months, you can do a lot about it.
If you have six months, you can do less about it
and if you have less than a month left
you can do very little about it.
Sometimes you won't know exactly what it takes
to fix your startup, but if you don't have the time
you will not be able to do it.
So yes, you can move your company
from default dead to default alive,
but only if you have the time.
Okay, but I hear you say, "Isn't time just money?"
Well, yes, there is a connection,
but the conversion from money to time can vary a lot.
It's almost like an exchange rate,
like you convert a dollar to a euro.
The exchange rate between money and time is your burn rate,
how much money you spend every month.
So even if the money is set, you can actually
change the exchange rate and get more time for that money.
So how do you change your burn rate?
Well, there are two components, costs and revenue.
Let's talk briefly about cost
and why you need to cut costs quickly if you need more time.
Sequoia illustrated this really well
in a post they made recently.
They called "Survival of the Quickest."
Let's take a look at Company A first, the red line.
Something happens in May
and they realize sales are not growing like they should
or the funding market has changed.
Still Company A in the red line,
they decide to do nothing about it.
They ignore it and keep letting the expenses increase
and keep their fingers crossed.
A few months later they realize they have to do something.
They cut a little
and realize they have to cut again and again.
This is a spiral of death.
They lost the time and there's nothing they can do about it.
It's too late.
Company B, the green line,
on the other hand, handles it differently.
When they see some things up, they cut hard right away.
This is hard and not easy, but sometimes it has to be done.
They cut while they still have the time.
They come out much stronger with a lower cost base.
This is the "Survival of the Quickest."
Okay, let's get to the tricky part of default alive
or default dead, as if this isn't tricky enough already.
And this is where investor's
and founder's interests might not align.
And now we're moving to the latest in 2022 and 2023.
Take a look at this tweet
from VC David Sachs a few months ago.
Instead of thinking about
whether you're default alive or default dead, think about
whether you're default investible or default uninvestible.
Another VC, Hunter Walk says, "Default alive is a trap."
Okay, what is this all about?
How can default alive be a trap
and what is default investible?
Hunter has a full medium post on this,
link in the description.
And this is where founders and investors might not align.
Let me explain.
First, let's have a look at what default investible means.
It's quite simple.
"Default investible means that your startup
is in a state where the investor wants to invest."
This means we have the right growth
and the growth is sustainable.
Losing money is okay and being default dead is also okay.
It basically means that the prospects
of making a good investments are good.
So the investors are saying the most important thing
is to be default investible.
But there is a problem with that,
because there is a correlation
between being default dead and default investible.
Okay, let's have a look at the correlation
between default dead or alive, or default investible or not.
Actually, it all comes down to growth and profit.
Okay, we start with the connection
between growth and profit
and default alive or default dead.
The higher the growth,
the more like it is that the startup is dead.
If the startup is profitable or close to profitable,
it's probably default alive.
You might comment here, "That's not true.
If there's really high growth,
it's likely we actually make it to default alive."
Mathematically that's true,
but in reality it usually costs so much to grow
that this correlation is actually true.
I've also made an horizontal line here
meaning the stage the startups at.
On the left we have early stage
and on the right, late stage.
This will be relevant in a second.
A typical journey for a startup
goes from the upper left corner with massive growth
and default dead down to the bottom right
where it's default alive and profitable.
Just like the red line here.
Now then, how does default investible come in here?
It actually comes down as a band
across from the top left to the bottom right.
Investors would like to invest in a company
with the right balance between growth and profit,
depending on the stage the company is at.
At the early stage you want high growth
and you're definitely default dead.
But as the startup matures,
you're okay with less growth, more profit,
and probably default alive.
So this is startup things don't always go to plan.
Let's have a look at some of the other areas here.
All the way on the top right
we have late stage companies with massive growth
and very far from default alive.
This is what I call SoftBank territory.
They're the only one who go for crazy growth
at the late stage, and we saw how that worked with WeWork.
It's just way too risky.
Another dangerous area is below the investible band,
but still default dead.
In this area, growth is too low.
You're not investible, but you're still not profitable.
I do see this a lot.
You want to be a growth startup
but you don't really have the growth to do it,
so you're basically burning money,
but you're not getting the growth.
This is a death zone.
You have to move up to default investible
or down to default alive.
In between is very dangerous.
Below the line, we have a lot of lifestyle businesses.
They're good businesses, but they're not startups.
Check my video on what a startup is,
if you want to know more.
They're probably default alive and they will be fine,
but they're not an investible startup.
Okay, back to the tweets from earlier.
They're worried that you'll default alive too early,
but you are outside default investible,
like this area here.
You'll probably survive,
but the lower growth means you're not investible
from an investor point of view.
That's what they're pointing out and they do have a point.
Good. All you have to do is stay
in the band in the middle, you'll be fine.
Sounds easy. Not quite.
Let's take a look at what happens
when the market changes like it did in 2022.
We have a Startup X that's positioned right around here.
Startup X is doing the exact same things they did before,
but the market has changed.
The band is moving. Take a look here.
Now the band has moved
and suddenly Startup X is not investible anymore.
This is where you need time.
Time to move back into default investible or default alive.
Now, Startup X is fine.
They have enough money,
they're gonna push all the way to default alive.
This can be done by cost cutting or other activities.
The problem is that the market suddenly changed
and a lot of startups did not have the time.
They were in trouble.
You can actually draw a vertical line from your position
and the length of the line, symbolize your cash or time.
If you take Startup X again,
if they had less money, less time,
they could have have died at no real fault of their own.
A little more, they can either go to investible or alive.
So it's a good idea to know where you are,
especially when the market changes.
You need cash in the bank
that will give you time and then you move fast.
It's "Survival of the Quickest."
I have multiple videos on the subject.
Please check out my video with Olga
and the "Metafy Story" on what they went through in 2022.
Now take a good look at this graph.
You really need to know where you stand,
especially in uncertain times.
Good luck.
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