11 ms·

Default Alive or Default Dead?

• jacquesm 11y ago
  > 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 alive or default dead. This accurately reflects my own experience. Most common pitfall: converting VC capital to users at a rate that will not sustain the company once the VC capital runs out. So many companies fall into this particular trap that it should have a name of its own. Bought growth is only worth it if the users remain long enough to make back the money you pumped into them at the time of acquisition in net profits otherwise you might as well do without them. I'm not sure if the reference to airbnb helps, whatever they did, they're an outlier and simply doing what they did without carefully evaluating your reasons is going to work about as well as any other cargo-cult strategy to success, it would be (a lot) more useful to see this point expressed in an alternate form, start-ups funded by YC in cohorts of months from when they started hiring besides the founders compared to their survival rate.
  • waterlesscloud 11y ago
    My suspicion is most founders actually do have a pretty good idea of the answer on some level of consciousness, but avoid thinking about because it's terrifying. I'd lay heavy odd the subconscious thought process goes along the lines of "If I'm default dead I have no idea how to fix it and so I feel powerless about it and that terrifies me and so I don't want to think about it and so I don't know the answer." Not that that's exactly a successful strategy, but people don't always lock on successful strategies.
    • yesimahuman 11y ago
      As a founder, I know all too well how easy it can be to ignore these potential issues. The funny thing is when you actually confront them and analyze your situation, you gain control. It's more relieving knowing than ignoring (because you never really ignore something like this without knowing you're doing it).
      • jacquesm 11y ago
        That's very strongly tied into personal responsibility, if you identify a problem and you tie it to your own performance you essentially look the problem in the eye and you say 'I can fix this'. If you ignore the problem or make yourself believe it is someone else's job or problem to fix this then you make it impossible for yourself to do something about it which hands control of your future to outsiders. The more problems you're willing to confront and analyze the bigger your chances of succeeding because all of those will be your problems and therefore very likely fixable.
        • gregpilling 11y ago
          If you don't own the problem, you can't fix the problem
        • Retric 11y ago
          Success is more random than your suggesting. IMO, the goal is to take risks that are in your favor. The less you know the harder this becomes. If your default alive then you should consider being somewhat conservative. But, if your default dead then you need to risk something because your already losing.
          • jacquesm 11y ago
            The randomness of luck only comes into play when you've done everything else right, it's one huge 'AND' gate with luck as one of the factors. If you mess up on one of the others you're still dead no matter how lucky you were. So by improving the rest of the gate functions the importance of the luck element goes up because it may be at some point the only item between you and success and then if it swings your way you're suddenly doing very well. See also: the myth of the overnight success. All that is is a ton of preparatory work and one opportunity properly seized.
    • dsugarman 11y ago
      The calculation isn't that simple to calculate, it really requires a spreadsheet or calculus, you can't in general calculate it in your head. A simple heuristic is "is my runway going down or up", it is conservative.
• analog31 11y ago
  My inability to comprehend the idea that 8 or 9 months is "old" is probably the surest sign that I'm the one who's old.
  • jacquesm 11y ago
    Calling them old is maybe a bit much but lots of start-ups never make it to the 1 year mark, 8 or 9 months is doing pretty good especially if the company hasn't yet had any outside investment.
  • stephengillie 11y ago
    Like most "new" ideas in the Startup world, what's new is old already. This is just people not understanding how their cash flows affect their balance sheet. Does the business turn a profit? Is the profit greater than their payroll? How many founders know their EBIDTA? And even more, when growing the business, are you growing costs faster than profits? Yes, this employee is necessary. But will they add more profit than they cost, at this stage in the business; or should we hire this person in a few months? This is because many founders get used to being able to go back and ask for more money if things aren't going well...right up until they get turned down. I'm being unfair, but it's always seemed like investors play a parent, and the founder plays a child, and it's just a child asking their parent for more money. And I honestly believe this level of entitlement is necessary to be a successful founder.
    • yid 11y ago
      > Does the business turn a profit? Is the profit greater than their payroll? How many founders know their EBIDTA? The first two questions are considerably more important than the third. That many founders do not know answers to the first two is less excusable than knowing a fairly specific accounting metric.
    • etrain 11y ago
      EBITDA.
  • paulsutter 11y ago
    Not to quibble, but he didn't refer to them as old. He said from that point on, the first thing he wants to know if whether they are default dead, or default alive.
• Multiplayer 11y ago
  I love that calculator. Picture is worth 1,000,000 words here.
• 7Figures2Commas 11y ago
  > Instead you'll be compelled to seek growth in other ways. For example, by doing things that don't scale, or by redesigning the product in the way only founders can. And for many if not most startups, these paths to growth will be the ones that actually work. Or you could reconsider the size of your total addressable market (hint: it's probably a lot smaller than what's in your pitch deck) and give weight to building a smaller company that's sustainably profitable. Note that I'm not suggesting growth isn't important. What I am suggesting is that a lot of founders seek "Silicon Valley growth" without considering the possibility that they have an opportunity to build a lasting business that doesn't need hundreds of employees, tens of millions of dollars in funding, hundreds of millions in revenue and billions in enterprise value to succeed.
  • voltagex_ 11y ago
    TarSnap and Pinboard are my favourite examples of businesses that don't need VC to succeed.
    • chubot 11y ago
      Those are both essentially one person businesses as I understand. There are lots of bigger ones, like imgur, Github, Atlassian (I think), 37signals, Fog Creek, etc.
      • fearless 11y ago
        Most of your examples have raised large amounts of VC funding. It's debatable whether they "need" the funding to success, but they certainly wanted it enough to eat the dilution.
        • seiji 11y ago
          With the above examples: imgur has raised $40 million and can barely keep one website running. GitHub has raised $350 million and can't seem to add new features or fix existing features. 37signals did fake funding just to get connections, but they at least isolated themselves and stopped trying to infect the rest of their world in their hype bubble.
• numlocked 11y ago
  It's amazing to me how deeply ingrained software profit margins are into the start-up world. That calculator...we're an ecommerce company that holds inventory...I spent 30 seconds searching for how to set gross margins on the revenue then realized it assumes all revenue is 100% gross margin. In most businesses (read: anything other than software and maybe pharma), manipulating margin is one of the biggest levers (maybe THE biggest) you have to affect profitability. Not to mention other big levers like working capital (and potentially running a business with negative WC and generating cash, a la Amazon). It's funny to be running a start-up in SF and still feel a world apart from a lot of the ecosystem.
  • tlb 11y ago
    Is there a better word? Net revenue? It should be the bottom line of everything that scales, while the red line is the bottom line of everything that's O(1), like engineering. GAAP doesn't seem to have a specific word for that.
    • hantusk 11y ago
      Gross profits is the term. Gross profits is net revenue minus cost of goods sold. Cost of goods sold is only the direct cost of goods, and does not include any operating expenses. Net revenue is Gross revenues minus discounts, returns and allowances.
• kra34 11y ago
  It's interesting to see the tone change from Paul Graham and Sam Altman in the last couple of months, its almost like somebody finally bought them a calculator.
  • dang 11y ago
    Doesn't seem that way to me. pg has been saying much the same things for years—e.g. this essay is obviously a continuation of http://paulgraham.com/pinch.html http://paulgraham.com/pinch.html, and that one continued from others I'm too lazy to look up. Sam has been saying the same thing about hiring for years. Trevor's calculator that the essay links to is old as well.
    • kra34 11y ago
      http://blog.samaltman.com/ http://blog.samaltman.com/ I'd say three of his last four posts are more negative than he has been historically. I've also observed an increasing number of articles about properly calculating financials, unit economics, and hiring "killer sales teams." I don't know that it means anything, but there does seem to more of that kind of chatter - and not from the buzzfeed "Bubble!!!!!!" kind of sources that its been pouring from for years.
      • puredemo 11y ago
        Which seems like BS, since WhatsApp obviously didn't need strong financials to be acquired for an amazing amount.
  • CPLX 11y ago
    Perhaps they are having to dispense this advice more often in their day to day mentoring. I could see how the growth and success of YC could breed magical thinking among its participants.
    • visakanv 11y ago
      That's my thinking too. Startups have become more "sexy" since The Social Network and such. So YC is probably seeing a lot more naive/opportunistic gold-rush type folks than before.
• JshWright 11y ago
  In the world of high angle rope rescue, we have a concept called the "whistle test". The idea is that if someone were to randomly blow a whistle at _any_ point, and everyone let go of whatever they were holding, that no one would be dropped. It takes a lot of thought and planning to make sure you're 'default alive' in all circumstances. It slows you down, and it requires you to think through the implications of every decision, big and small. This sounds like a fairly similar notion...
  • japhyr 11y ago
    Where do you do rescue work? I do mountain rescue in southeast AK. I wouldn't work with a team that didn't use the whistle test.
    • JshWright 11y ago
      Upstate New York
    • eigenvector 11y ago
      In the world of industrial rope-access, it'd be illegal in most jurisdictions to use any rope system that wasn't 100% safe to fall in to at any given time.
  • nostrademons 11y ago
    I think that relatively few startups would get started if they all had to be 'default alive' - founding a startup would be limited to folks who were already independently wealthy. The point of the article, I think, is that if you're 'default dead', you should know that you're default dead, and your attention should be focused on getting to a state where you're 'default alive'.
    • JshWright 11y ago
      Absolutely. My point in making the analogy is that 'default alive' is _very_ expensive, and a lot of work. It's probably not worth it in an early stage startup. The stakes just aren't that high.
• paulsutter 11y ago
  > In practice there is surprisingly little connection between how much a startup spends and how fast it grows. When a startup grows fast it's usually because the product hits a nerve, in the sense of hitting some big need straight on. Perhaps the most important underlying point in the article. It's easy to think that more people will make the company grow faster. Adding people actually makes it harder to tune a product's direction (and thus growth rate). Great to see another dense and on-point post from pg. Every sentence is worth several reads.
  • mooreds 11y ago
    I think that having more people also makes it harder to focus. When it is just one or two folks, you have to ruthlessly prioritize. I am working on a side project and we are at the point that I only want to do things that either bring in money or extend our reach (in terms of data). Because it is a side project, it is hard to be ruthless, but it feel it's what is needed. The pressure on a full time founder must be 10x or100x what I feel.
  • roasm 11y ago
    Well, this is mostly only true of the high margin, hoping-for-viral-growth so loved by the internet VCs. There are a ton of highly profitable, relatively low margin businesses (at least compared to internet services), like consulting or something with high sales effort, like enterprise products. In those cases, you can easily imagine your growth limited by, and accelerated by, your ability to hire and grow the right talent.
    • paulsutter 11y ago
      VCs aren't merely hoping for hypergrowth, their business model demands it. The results for any given VC fund are dominated by 1 to 3 hypergrowth companies. Therefore, hypergrowth companies should be their sole focus. You're right that consulting companies can be great businesses. A friend of mine sold a 5 year old consulting company for a good tens of millions last year. That's a stellar result for the founders. But few consulting companies are within a VC's "strike zone".
  • 11y ago
• AndrewKemendo 11y ago
  I feel like having the mentality that you are always default dead is where your head should be as a founder. That's how I run my company. Complacency kills, and prevents being able to be proactive in an ever changing market.
• jaytaylor 11y ago
  Why is there a shopping cart in the upper right hand corner of his website? What Is available for purchase from Paul?
  • callahad 11y ago
    Look into the history of Viaweb :)
  • NhanH 11y ago
    Where did you see the shopping cart? I have never seen it and still don't even now (after looking for it)
    • x1798DE 11y ago
      It's in the upper right hand corner on mobile.
• caf 11y ago
  But as a founder your incentives are different. You want above all to survive. This is a bit like in the early stages of a poker tournament, where you might fold even quite strong starting hands to all-in bets where your expected value is positive - because you're not just betting the number of chips in your stack, you're betting the entire remainder of your tournament.
  • visakanv 11y ago
    Nice way of framing it, clicked a couple of things in my head.
• vasilipupkin 11y ago
  Aren't most startups except for very very few super start top ones, default dead by definition, maybe until B stage?
• codingdave 11y ago
  I'm surprised it takes an interview with pg for this question to be raised. I would be asking it in an interview before I ever sign on as a new hire.
  • DerKobe 11y ago
    That's because it always takes some kind of "celebrity" to raise awareness :-) It's good for you that you are aware of this but a lot of people (sadly) aren't.
• TrevorJ 11y ago
  Reminds me of a great episode of Dirty Jobs: https://www.youtube.com/watch?v=Ap3peqZ0RlA&feature=youtu.be&t=85 https://www.youtube.com/watch?v=Ap3peqZ0RlA&feature=youtu.be...
• Animats 11y ago
  For the first dot-com boom, I did Downside's Deathwatch[1], which did exactly that for public companies. (Companies IPOed earlier in that boom, often before profitability.) For a public company, SEC filings give anyone enough info to make that calculation. For a private company, it's much harder to tell from the outside. Any CEO who doesn't know how many months (days?) of cash they have left is hopeless. [1] http://www.downside.com/deathwatch.html http://www.downside.com/deathwatch.html
• copsarebastards 11y ago
  > Say "We're default dead, but we're counting on investors to save us." Maybe as you say that it will set off the same alarms in your head that it does in mine. And if you set off the alarms sufficiently early, you may be able to avoid the fatal pinch. To make this alarm explicit: if you were that investor, would you save the company? I wouldn't.
• urs2102 11y ago
  Despite this definitely being important for all businesses at some point, where does this come in when evaluating businesses like early Facebook and Google where prior to monetization, wouldn't they appear to be "default dead"?
• DrNuke 11y ago
  Bootstrapping attitude to the rescue: the more you do with little money, the more you can do when money is raised, and longer.
• PhilipA 11y ago
  It feels like this post is somewhat also addressing the very high burn rates which companies have, and that you should have control over your trajectory before you begin burning all your money.
• andrewstuart 11y ago
  This is effectively saying that these businesses don't have cashflow projections. Business 101 - should be taught by whoever the investors are that are "adding value".
• rsp1984 11y ago
  There is a lot of truth in this essay but readers should know how to interpret it. When PG assumes stable revenue growth for "the last several months", even just revenue at all, for a startup that's been operating for not even a year, that already narrows down the set of startups for which his advice is applicable quite a bit. What we're essentially talking about then is a specific breed of startup (a popular breed, but still a specific breed): - Pure software / probably SaaS or a website. - Margin close to 100%. - Essentially no R&D component, i.e. just wiring together existing technologies. - Perfect product distribution infrastructure, i.e. internet or mobile app company. What readers should know however is that outside of this subset of startups there is a wide variety of flowers in the startup ecosystem that can all bloom in different ways and at different times. And that early growth isn't the only metric that makes a startup attractive. Growth a powerful one that eventually will be more important than everything else, but there are other things -- such as strong core IP or having early product in a small but growing market -- that make startups interesting. Then there's startups that require literally tens of millions of dollars of up-front investment and years of R&D before there even is a product. Are those all doomed? I guess not. Given the right execution and strategy and patient investors these companies can also be extraordinarily valuable. They are just a different kind though.
• debacle 11y ago
  If Twitter would have heeded this advice, it may not be in the bind that it's in right now. Four thousand employees! At Twitter! That's an order of magnitude more than they need.
  • icedchai 11y ago
    I wonder what all these people are doing. Browsing HN, probably.
• logicallee 11y ago
  What about "Default no progress forever."? Let's suppose someone is building a new airplane and has a hundred subscribers paying $10 per year for their newsletter. Nobody is funding this person, and the business is alive forever. Default alive or default dead? It's alive until the founder realizes he will never raise a round capable of building an airplane, and pivots and does something cheap and easy online instead.