October 2015When I talk to a startup that's been operating for more than 8 or9 months, the first thing I want to know is almost always the same.Assuming their expenses remain constant and their revenue growthis what it has been over the last several months, do they make it toprofitability on the money they have left? Or to put it moredramatically, by default do they live or die?The startling thing is how often the founders themselves don't know.Half the founders I talk to don't know whether they're default aliveor default dead.If you're among that number, Trevor Blackwell has made a handycalculator you can use to find out.The reason I want to know first whether a startup is default aliveor default dead is that the rest of the conversation depends on theanswer. If the company is default alive, we can talk about ambitiousnew things they could do. If it's default dead, we probably needto talk about how to save it. We know the current trajectory endsbadly. How can they get off that trajectory?Why do so few founders know whether they're default alive or defaultdead? Mainly, I think, because they're not used to asking that.It's not a question that makes sense to ask early on, any more thanit makes sense to ask a 3 year old how he plans to supporthimself. But as the company grows older, the question switches frommeaningless to critical. That kind of switch often takes peopleby surprise.I propose the following solution: instead of starting to ask toolate whether you're default alive or default dead, start asking tooearly. It's hard to say precisely when the question switchespolarity. But it's probably not that dangerous to start worryingtoo early that you're default dead, whereas it's very dangerous tostart worrying too late.The reason is a phenomenon I wrote about earlier: thefatal pinch.The fatal pinch is default dead + slow growth + not enoughtime to fix it. And the way founders end up in it is by not realizingthat's where they're headed.There is another reason founders don't ask themselves whether they'redefault alive or default dead: they assume it will be easy to raisemore money. But that assumption is often false, and worse still, themore you depend on it, the falser it becomes.Maybe it will help to separate facts from hopes. Instead of thinkingof the future with vague optimism, explicitly separate the components.Say "We're default dead, but we're counting on investors to saveus." Maybe as you say that, it will set off the same alarms in yourhead that it does in mine. And if you set off the alarms sufficientlyearly, you may be able to avoid the fatal pinch.It would be safe to be default dead if you could count on investorssaving you. As a rule their interest is a function ofgrowth. If you have steep revenue growth, say over 5x a year, youcan start to count on investors being interested even if you're notprofitable.[1]But investors are so fickle that you can neverdo more than start to count on them. Sometimes something about yourbusiness will spook investors even if your growth is great. So nomatter how good your growth is, you can never safely treat fundraisingas more than a plan A. You should always have a plan B as well: youshould know (as in write down) precisely what you'll need to do tosurvive if you can't raise more money, and precisely when you'll have to switch to plan B if plan A isn't working.In any case, growing fast versus operating cheaply is far from thesharp dichotomy many founders assume it to be. In practice thereis surprisingly little connection between how much a startup spendsand how fast it grows. When a startup grows fast, it's usuallybecause the product hits a nerve, in the sense of hitting some bigneed straight on. When a startup spends a lot, it's usually becausethe product is expensive to develop or sell, or simply becausethey're wasteful.If you're paying attention, you'll be asking at this point not justhow to avoid the fatal pinch, but how to avoid being default dead.That one is easy: don't hire too fast. Hiring too fast is by farthe biggest killer of startups that raise money.[2]Founders tell themselves they need to hire in order to grow. Butmost err on the side of overestimating this need rather thanunderestimating it. Why? Partly because there's so much work todo. Naive founders think that if they can just hire enoughpeople, it will all get done. Partly because successful startups havelots of employees, so it seems like that's what one does in orderto be successful. In fact the large staffs of successful startupsare probably more the effect of growth than the cause. Andpartly because when founders have slow growth they don't want toface what is usually the real reason: the product is not appealingenough.Plus founders who've just raised money are often encouraged tooverhire by the VCs who funded them. Kill-or-cure strategies areoptimal for VCs because they're protected by the portfolio effect.VCs want to blow you up, in one sense of the phrase or the other.But as a founder your incentives are different. You want above allto survive.[3]Here's a common way startups die. They make something moderatelyappealing and have decent initial growth. They raise their firstround fairly easily, because the founders seem smart and the ideasounds plausible. But because the product is only moderatelyappealing, growth is ok but not great. The founders convincethemselves that hiring a bunch of people is the way to boost growth.Their investors agree. But (because the product is only moderatelyappealing) the growth never comes. Now they're rapidly running outof runway. They hope further investment will save them. But becausethey have high expenses and slow growth, they're now unappealingto investors. They're unable to raise more, and the company dies.What the company should have done is address the fundamental problem:that the product is only moderately appealing. Hiring people israrely the way to fix that. More often than not it makes it harder.At this early stage, the product needs to evolve more than to be"built out," and that's usually easier with fewer people.[4]Asking whether you're default alive or default dead may save youfrom this. Maybe the alarm bells it sets off will counteract theforces that push you to overhire. Instead you'll be compelled toseek growth in other ways. For example, by doingthings that don't scale, or by redesigning the product in theway only founders can.And for many if not most startups, these paths to growth will bethe ones that actually work.Airbnb waited 4 months after raising money at the end of Y Combinatorbefore they hired their first employee. In the meantime the founderswere terribly overworked. But they were overworked evolving Airbnbinto the astonishingly successful organism it is now.Notes[1]Steep usage growth will also interest investors. Revenuewill ultimately be a constant multiple of usage, so x% usage growthpredicts x% revenue growth. But in practice investors discountmerely predicted revenue, so if you're measuring usage you need ahigher growth rate to impress investors.[2]Startups that don't raise money are saved from hiring toofast because they can't afford to. But that doesn't mean you shouldavoid raising money in order to avoid this problem, any more thanthat total abstinence is the only way to avoid becoming an alcoholic.[3]I would not be surprised if VCs' tendency to push foundersto overhire is not even in their own interest. They don't know howmany of the companies that get killed by overspending might havedone well if they'd survived. My guess is a significant number.[4]After reading a draft, Sam Altman wrote:"I think you should make the hiring point more strongly. I thinkit's roughly correct to say that YC's most successful companieshave never been the fastest to hire, and one of the marks of a greatfounder is being able to resist this urge."Paul Buchheit adds:"A related problem that I see a lot is premature scaling—founderstake a small business that isn't really working (bad unit economics,typically) and then scale it up because they want impressive growthnumbers. This is similar to over-hiring in that it makes the businessmuch harder to fix once it's big, plus they are bleeding cash reallyfast."Thanks to Sam Altman, Paul Buchheit, Joe Gebbia, Jessica Livingston,and Geoff Ralston for reading drafts of this.
