Default alive or default dead? How to run Paul Graham’s survival test

Unofficial. Not affiliated with or endorsed by Paul Graham or Y Combinator. Every teaching links to the original essay or talk.

1. 1

   What question does Paul Graham ask first?

   In ‘Default Alive or Default Dead?’ (October 2015), Graham says that when he talks to a startup that has been running for more than 8 or 9 months, the first thing he wants to know is whether it is default alive or default dead. "Half the founders I talk to don’t know whether they’re default alive or default dead."

   The answer changes the whole conversation. If the company is default alive, he says, they can talk about ambitious new things it could do. If it is default dead, the conversation is about how to save it.

   Key idea

   Know which one you are before anyone asks you.

2. 2

   How do you calculate it?

   Graham’s definition: assume your expenses stay the same and your revenue keeps growing at the rate it has over the last several months. Do you reach profitability on the money you have left? If yes, you are default alive. If no, you are default dead.

   You need three numbers: money in the bank, monthly expenses, and monthly revenue with its recent growth rate. Then step forward one month at a time until revenue covers expenses or the cash runs out. Trevor Blackwell, one of YC’s founders, made a calculator for this, and Graham links it from the essay.

   The example below uses made-up numbers. Notice two things: growth buys you far more time than simple “cash divided by burn” suggests, and a small change in growth rate or costs can flip the answer.

   • Use real numbers from your bank statement, not plans.
   • Use the growth rate of the last three to six months, not the best month.
   • Same math works in rupees or any currency.

   Simple runway: 600k / (80k - 20k) = 10 months
   
   A) Revenue grows 10% a month
   Month  Revenue  Burn   Cash left
     3     26.6k   53.4k   433k
     6     35.4k   44.6k   290k
     9     47.2k   32.8k   179k
    12     62.8k   17.2k   110k
    15     83.5k     0     95k   -> profitable. DEFAULT ALIVE
   
   B) Revenue grows 8% a month
     9     40.0k   40.0k   150k
    12     50.4k   29.6k    50k
    14     58.7k   21.3k     3k
    15     63.4k   16.6k   -14k  -> out of cash. DEFAULT DEAD
   
   C) 8% growth, but expenses held at 65k (one fewer hire)
    15     63.4k    1.6k   211k
    16     68.5k     0    211k   -> profitable. DEFAULT ALIVE

3. 3

   Why don’t founders know, and what is the fatal pinch?

   Graham gives two reasons. Early on the question seems meaningless, so founders get out of the habit of asking, and later it becomes critical without anyone noticing the switch. And founders assume it will be easy to raise more money, which is often false.

   He wrote about where that leads in ‘The Fatal Pinch’ (December 2014). The company has a meaningful amount of money in the bank, is losing a lot each month, revenue growth is weak, and the plan is to raise more before the money runs out. "That last sentence is the fatal one." In the later essay he sums the pinch up as default dead, plus slow growth, plus not enough time to fix it.

   Raising again is harder than the first time for three reasons: you now spend more, investors hold already-funded companies to a higher standard, and you now look like a possible failure. That is why YC tells founders who raise money to act as if it is the last they will ever get.

   1. Default dead↓→
   2. Slow growth↓→
   3. Few months left↓→
   4. Plan: “we’ll raise”↓→
   5. Fatal pinch
4. 4

   What usually makes a startup default dead?

   Graham says hiring too fast is by far the biggest killer of startups that raise money. Founders hire because successful startups have lots of employees, so it looks like the thing to do. And most overestimate how many people they need.

   The deeper problem is that growth is weak because the product is not good enough yet. Hiring people, he says, is rarely the way to fix that. Fast growth usually comes from a product that meets a big need, and spending is only loosely tied to growth. In a footnote he quotes Sam Altman: "I think it’s roughly correct to say that YC’s most successful companies have never been the fastest to hire."

   The ‘18 Mistakes That Kill Startups’ (2006) said the same thing a decade earlier: the classic way to burn through cash is by hiring a lot of people.

   • Before each hire, rerun the calculation with that salary added. If it flips you to default dead, wait.
   • Ask whether growth is slow because you lack people, or because the product is not yet something people want.

   Key idea

   If growth is slow, more people rarely fix it. A better product does.

5. 5

   What should you do if you are default dead?

   In the 2015 essay, Graham’s advice is not to count on investors. Work out precisely what you would need to do to survive without new money, and when you would switch to that plan.

   ‘The Fatal Pinch’ gives three options. Shut down, if failure is certain. Cut expenses, including non-salary costs and anyone you already know should go. Or make more money: consider having everyone work on selling, and change the question from “do you want to buy our product?” to “what do you need that you’d pay a lot for?” He says to lean toward cutting if overhiring caused the problem, and toward revenue if the team is small.

   The safe place to aim for is ramen profitable. In ‘Ramen Profitable’ (July 2009) he defines it as making just enough to pay the founders’ living expenses, which means you are no longer at the mercy of investors. He adds it is not the destination; the goal is still to grow big. And he ends ‘The Fatal Pinch’ with hope: plenty of successful startups have passed through near-death experiences and gone on to flourish.

   • Write your “survive without investors” plan on one page: what you cut, what you sell, and the date you start.
   • Rerun the calculation every month. Start asking early; Graham says worrying too early is far less dangerous than worrying too late.

In his own words

Straight from the source

What Paul Graham or YC actually wrote or said, taken apart, then what to do with it this week.

Paul Graham

Co-founder of Y Combinator, essayist

Default Alive or Default Dead? (essay, October 2015)

1 · Understand

Every startup older than about 8 or 9 months should know whether, on current expenses and growth, it reaches profitability on the cash it has. Half the founders he asks don’t.

2 · Break it down

• Three inputs: cash, expenses, and the recent revenue growth rate.
• Founders avoid the question because it once seemed meaningless and because they assume they can raise more.
• Hiring too fast is by far the biggest killer of startups that raise money.
• Ask too early rather than too late; an early alarm can keep you out of the fatal pinch.

3 · Use it

Put the calculation in a sheet you update every month, and rerun it before every hire.

Paul Graham

Co-founder of Y Combinator, essayist

The Fatal Pinch (essay, December 2014)

1 · Understand

Many startups pass through a point a few months before they die: money in the bank, heavy losses, weak growth, and a plan to raise more. That plan is the fatal part.

2 · Break it down

• A second raise is harder: you spend more, investors expect more, and you look like a possible failure.
• YC tells founders who raise money to act as if it is the last they will ever get.
• Ways out: shut down, cut expenses, or make more money by asking customers "what do you need that you’d pay a lot for?"

3 · Use it

Treat your current cash as all you will ever get, and plan so that you reach profitability on it.

6 terms

Words to know

Default alive

With expenses flat and revenue growing at its recent rate, the company reaches profitability on the money it has.

Default dead

On current numbers, the money runs out before profitability. Survival depends on raising more.

Fatal pinch

Graham’s name for being default dead, growing slowly, and without enough time to fix it, while counting on raising more.

Ramen profitable

Making just enough to pay the founders’ living expenses, so you no longer depend on investors to survive.

Burn

How much more you spend than you earn each month.

Overhiring

Hiring faster than the business needs. Graham calls it by far the biggest killer of startups that raise money.

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Do this week

Put it into practice

Compute your default alive date

1. 1Collect three numbers: cash in the bank today, average monthly expenses for the last 3 months, and monthly revenue for the last 6 months.
2. 2Work out your average monthly revenue growth rate over those months.
3. 3In a spreadsheet, roll forward month by month: revenue grows by that rate, expenses stay flat, cash drops by the gap. Or use Trevor Blackwell’s calculator linked below.
4. 4Write down the answer: default alive (and the month you reach profit) or default dead (and the month cash hits zero).
5. 5If you are default dead, write one line each for: what you would cut, what you would sell, and when you would switch plans.
6. 6No startup yet? Run it for a startup you admire using numbers from its public interviews, or for your own personal savings and spending.

Trevor Blackwell’s Startup Growth Tool (linked from the essay)

3 questions · instant feedback

Check yourself

Pick an answer to see if you are right, and why.

Question 1

Question 1 of 3

A startup has $300k, spends $50k a month, earns $10k a month, and revenue has been flat for six months. Which is it?

ADefault alive, because it has six months of cashBDefault dead, because flat revenue never reaches $50k before the cash runs outCDefault alive, if it can raise a seed roundDCannot be known without a valuation

Question 2

Question 2 of 3

A default dead startup with slow growth plans to fix things by hiring five salespeople with its remaining money. What would Graham warn?

AGood plan, more people means more growthBHiring is rarely the fix; slow growth usually means the product isn’t good enough yet, and the hires bring the end closerCOnly hire engineers, never salespeopleDHire, but raise a bigger round first

Question 3

Question 3 of 3

Your team is three founders with no employees, and you are default dead. Per ‘The Fatal Pinch’, where should you lean first?

AFire peopleBShut down immediatelyCMake more money: everyone sells, and ask customers what they need that they would pay a lot forDWait for the market to improve

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Up next · Lesson 13 · 15 minHow to raise moneyPaul Graham’s advice is to raise only if you need it and investors want in, to treat every investor as a no until money is committed, and to talk to many in parallel, ranked by expected value. The first commitment is the hardest; after that, investors follow each other. Raise less than you hope, take good offers fast, close the money, and get back to work.← Previous: Think and write clearly

People also ask

Questions people ask

What does default alive mean?+

A term from Paul Graham’s 2015 essay. A startup is default alive if, with expenses staying the same and revenue growing at its recent rate, it reaches profitability before running out of money. Otherwise it is default dead.

How do I calculate if my startup is default alive?+

Take your cash in the bank, monthly expenses and recent monthly revenue growth. Project month by month: revenue grows at that rate, expenses stay flat, cash falls by the gap. If revenue overtakes expenses before cash hits zero, you are default alive.

Is default alive the same as profitable?+

No. A default alive startup can still be losing money today. It just reaches profitability on the cash it already has, if current growth continues.

6 sources · checked Nov 2026

Sources and further reading

• Paul Graham, Default Alive or Default Dead? (Oct 2015)
• Paul Graham, The Fatal Pinch (Dec 2014)
• Paul Graham, Ramen Profitable (Jul 2009)
• Paul Graham, The 18 Mistakes That Kill Startups (Oct 2006)
• Trevor Blackwell, Startup Growth Tool (calculator linked from the essay)
• Y Combinator, Save Your Startup During an Economic Downturn (video)

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