Saving Your Startup During an Economic Downturn

**Michael Seibel** (0:00)
I remember, we had this meeting with a lot of our employees, and we were like, look, we got three options. We can die in two months, we can try to get to break even, or we can try to get this thing profitable. Hello, this is Michael Seibel with Dalton Caldwell, and today we're gonna talk about whether your startup is Default Alive or Default Dead. So this was a concept that was actually invented by one of the co-founders of YC, Paul Graham.
Dalton, do you just wanna start by explaining what this means?

**Dalton Caldwell** (0:37)
Yeah, I mean, so to start with, you should read his blog post. It is excellent, it is short, it is easy to read. And so you should read it. But let me try to give you my crash course in it. Here's what he means by Default Alive, Default Dead.
As founders, we like to ignore the truth a lot of the time. And one of those truths are, is my startup going to go out of business, right? It's kind of an awkward thing to talk about, you know? You don't want to bring that up in polite company. And so the point of Default Alive, Default Dead is it forces you to be honest with yourself.
If I don't raise any more money, am I gonna die? Am I out of business?
Or am I gonna make it? And Default Alive is different than Profitable. Profitable means today I make enough money that I am profitable. My bank account grows every month. You so with me? Default Alive means I may be burning money today, but my growth rate is high enough on revenue that I will become profitable before my bank account goes to zero. Does that make sense? And so if not a single other dollar of investor money comes into the business, my growth rate is high enough such that I don't have to lose sleep that I'm going to have to raise around before I die.
And his point is this is a binary. Either you are Default Alive or you are not Default Alive, thus Default Dead. There's no third option here, friends. It forces you to pin yourself down in your own mind, right? Does that sound right to you, Michael? Did I get that right?

**Michael Seibel** (2:12)
You nailed it. And what's interesting is that another YC co-finder, Trevor Blackwell, basically made a calculator that allows you to calculate this, because I would argue it's easy to calculate, but it's just nice to have a tool there where you could just input some numbers and we'll make sure that's linked to as well.
So I think that with this concept of Default Dead or Default Alive, what's so weird is how obvious it is. Like it's weirdly the kind of concept that the entrepreneur who runs a barber shop will understand before a startup founder will. It's so logical. What do you think are some of the reasons why founders have a hard time understanding this is important math to do? What's distracting them from this truth?

**Dalton Caldwell** (3:01)
I think the context is that if you've raised some money, say you're a YC company, you raise money at demo day, the belief that you'll be able to raise more money, it's hard to not take that for granted. And you're like, yeah, yeah, yeah. But really, once you've started raising money, you get hooked on it. Like you get hooked on the juice.
And so the idea that maybe you won't be able to raise the next round or that'll go harder than you want, to say that out loud is almost a showing, it's like you're not confident enough. I think it's awkward to speak of these things with your co-founders or with whoever, because it's almost like, well, of course you can raise the next round. Like we're gonna make it.
And so I think it's that, man. I think, again, we both been founders. I don't think you want to say this stuff out loud too much. It makes it sound like you're worried or scared. And you certainly would not want to admit this to your investors.

**Michael Seibel** (3:57)
Well, I think that here's the tricky bit in my mind. Not only is it that this idea of like, well, if we question our ability to raise the next round, are we not confident or are we going to psych some people out in our team and make them not want to work here?
It's that plus raising the next round is harder. So you kind of get screwed both ways. I think oftentimes founders believe that raising the next round is going to be like the last round. Even though they kind of understand that the next round there's a smaller pool of people who can do it, they're investing more money.