7 ms·

The Danger of Being Default Alive

58 points by hajak 10y ago

tarr11 10y ago
Curious if this is actually true, statistically speaking. Is there some statistically significant relationship between delaying profitability, investment and exit size? It would be interesting to see aggregated data on this. Ie, look at companies by cohort, determine if / when they became profitable, how many exited, at what amount, and how many failed, how many flatlined.
- deleted 10y ago
  [deleted]
vinceguidry 10y ago
As a kid, you are young, full of energy. As you mature, you learn to get more done with less. The basic challenge of adulthood is to learn how to do this while you are still having fun. Staying young and dumb is not an option any more than ossifying is. Maturity is getting everything you used to get done as a teenager done at five so you can go home to your other job of your family. Once you are cash flow positive, then it's time to grow up. Lock everything down and secure your revenue flows. It's not just your livelihood that rides on it, the people paying you to stay in business deserve a reliable service. Chase hares with whatever resources you have left. If you want to keep playing startup, the answer is to cash out and go start another startup.
tarsinge 10y ago
Nothing really substantial, basically an investor saying you should not be satisfied with your profitable business and that should take more risks (the obvious agenda being taking external investment)
Animats 10y ago
This is a VC perspective. They need 10x wins and expect mostly failure. From a VC perspective, the worst case is the zombie - cash flow positive, so you can't kill it, not making enough money to repay investors, and can't be ignored because the VC still owns it. A portfolio of zombies can eat all of a VC's time. It's easier on the VC if the losers just die already.
- codinghorror 10y ago
  Wait how do zombies eat time, exactly? If they have cash flow and are viable businesses, what do they need from the VCs that would take up their time?
  - dstaten 10y ago
    board meetings, requests for intros to people/customers, informal checkins, even just dealing with the company within the VC firm
  - andrewfromx 10y ago
    are u kidding? favor after favor the CEO asks from the network of each VC partner. Can you do this, can you intro me to that guy, and they can't say, "Well... but you're a zombie"
    - PhasmaFelis 10y ago
      Why can't they? I mean, yes, obviously, it's rude and unpleasant to say "I don't have time for you because you're not making enough money," but it's a lot more unpleasant to say "I'm firing you and all your employees even though you're making a profit because you keep asking for favors and it's annoying."
      - andrewfromx 10y ago
        Because until they are ready to cut their losses and actually burn this bridge with the entrepreneur, they want to be in a good position if the entrepreneur turns things around and all of a sudden the company is a hit. You don't want to finally get rid of a zombie only to find that if u waited 6 months that zombie would have been a hit.
        Chris2048 10y ago
        How do you burn your bridge? You still get rich don't you?
jobu 10y ago
"As an investor, I love founders that can balance this — being less dependent on external financing but still staying ambitious is ideal." I worked for a company with a founder like this, but I think he was driven by a love for chaos as much as ambition. Every time it seemed like things were going great and stress was down he would find a way to toss a grenade in the mix (new partner, new crazy-ass idea, etc). Often the grenades ended up being huge wins, but as the company got bigger he was forced to go through budgeting, product managers, development processes, QA, etc. It was never really clear if he was forced out or left on his own, but before he left he did mention to me how boring it had gotten.
- PhasmaFelis 10y ago
  > before he left he did mention to me how boring it had gotten. God save us from executives who think that the purpose of business is to entertain them.
  - orasis 10y ago
    But this is why we start the companies in the first place my friend. ;)
    - PhasmaFelis 10y ago
      Whaaaat? I was told that startups were all about using technology to make the world a better place for everyone!
dgreensp 10y ago
Dreams are prettier than reality. It's fun to not have customers. It's fun to just spend investors' money. Lots of things are fun, for a while.
aetherson 10y ago
Graham's essay does not describe "default alive" as being "cash flow positive." Rather, in his essay, "default alive" means that you are on a path towards being cash flow positive. "Assuming their expenses remain constant and their revenue growth is what it's been over the last several months, do they make it to profitability on the money they have left?"
gsharma 10y ago
I believe the author is confusing "Default Alive" with "Self Funded". In fact, raising money for a Default Alive company is a lot easier than Default Dead. Every Self Funded company has to be Default Alive, but the converse is not true.
rguzman 10y ago
this piece just highlights something that is well understood by a lot of people: non-rich/first-time founders and investors don't have aligned interests until the founders cash out. of course the VC prefers you die over you stopping to take risks. duh? they don't make money on cashflow positive companies. however, a lot of cashflow positive companies are really good outcomes for the founders and employees. as a founder, you ought to consider this before raising money.
nikanj 10y ago
The founder team of a default-alive company is in an immensely better bargaining position, and VC naturally prefer the kinds of deals people only sign in distress. It's hard to put the squeeze on people, when they can just decide to take the investment next year instead.
graeme 10y ago
As a bootstrapper with no interest in VC, I can say this rings true. I was never more productive than when I was scrambling to ensure financial sustainability. Once things became comfortable, I slowed down. Partly, this was good: recovering social life, dating, etc. You can't keep up a breakneck pace forever. But, I needing more money was a clear, objective metric that kept me focussed. Once you're default alive you need new metrics.

58 points by hajak 10y ago

Curious if this is actually true, statistically speaking. Is there some statistically significant relationship between delaying profitability, investment and exit size? It would be interesting to see aggregated data on this. Ie, look at companies by cohort, determine if / when they became profitable, how many exited, at what amount, and how many failed, how many flatlined.

deleted 10y ago
[deleted]

vinceguidry 10y ago

As a kid, you are young, full of energy. As you mature, you learn to get more done with less. The basic challenge of adulthood is to learn how to do this while you are still having fun. Staying young and dumb is not an option any more than ossifying is. Maturity is getting everything you used to get done as a teenager done at five so you can go home to your other job of your family. Once you are cash flow positive, then it's time to grow up. Lock everything down and secure your revenue flows. It's not just your livelihood that rides on it, the people paying you to stay in business deserve a reliable service. Chase hares with whatever resources you have left. If you want to keep playing startup, the answer is to cash out and go start another startup.

tarsinge 10y ago

Nothing really substantial, basically an investor saying you should not be satisfied with your profitable business and that should take more risks (the obvious agenda being taking external investment)

Animats 10y ago

This is a VC perspective. They need 10x wins and expect mostly failure. From a VC perspective, the worst case is the zombie - cash flow positive, so you can't kill it, not making enough money to repay investors, and can't be ignored because the VC still owns it. A portfolio of zombies can eat all of a VC's time. It's easier on the VC if the losers just die already.

codinghorror 10y ago
Wait how do zombies eat time, exactly? If they have cash flow and are viable businesses, what do they need from the VCs that would take up their time?
- dstaten 10y ago
  board meetings, requests for intros to people/customers, informal checkins, even just dealing with the company within the VC firm
- andrewfromx 10y ago
  are u kidding? favor after favor the CEO asks from the network of each VC partner. Can you do this, can you intro me to that guy, and they can't say, "Well... but you're a zombie"
  - PhasmaFelis 10y ago
    Why can't they? I mean, yes, obviously, it's rude and unpleasant to say "I don't have time for you because you're not making enough money," but it's a lot more unpleasant to say "I'm firing you and all your employees even though you're making a profit because you keep asking for favors and it's annoying."
    - andrewfromx 10y ago
      Because until they are ready to cut their losses and actually burn this bridge with the entrepreneur, they want to be in a good position if the entrepreneur turns things around and all of a sudden the company is a hit. You don't want to finally get rid of a zombie only to find that if u waited 6 months that zombie would have been a hit.
      - Chris2048 10y ago
        How do you burn your bridge? You still get rich don't you?

jobu 10y ago

"As an investor, I love founders that can balance this — being less dependent on external financing but still staying ambitious is ideal." I worked for a company with a founder like this, but I think he was driven by a love for chaos as much as ambition. Every time it seemed like things were going great and stress was down he would find a way to toss a grenade in the mix (new partner, new crazy-ass idea, etc). Often the grenades ended up being huge wins, but as the company got bigger he was forced to go through budgeting, product managers, development processes, QA, etc. It was never really clear if he was forced out or left on his own, but before he left he did mention to me how boring it had gotten.

PhasmaFelis 10y ago
> before he left he did mention to me how boring it had gotten. God save us from executives who think that the purpose of business is to entertain them.
- orasis 10y ago
  But this is why we start the companies in the first place my friend. ;)
  - PhasmaFelis 10y ago
    Whaaaat? I was told that startups were all about using technology to make the world a better place for everyone!

dgreensp 10y ago

Dreams are prettier than reality. It's fun to not have customers. It's fun to just spend investors' money. Lots of things are fun, for a while.

aetherson 10y ago

Graham's essay does not describe "default alive" as being "cash flow positive." Rather, in his essay, "default alive" means that you are on a path towards being cash flow positive. "Assuming their expenses remain constant and their revenue growth is what it's been over the last several months, do they make it to profitability on the money they have left?"

gsharma 10y ago

I believe the author is confusing "Default Alive" with "Self Funded". In fact, raising money for a Default Alive company is a lot easier than Default Dead. Every Self Funded company has to be Default Alive, but the converse is not true.

rguzman 10y ago

this piece just highlights something that is well understood by a lot of people: non-rich/first-time founders and investors don't have aligned interests until the founders cash out. of course the VC prefers you die over you stopping to take risks. duh? they don't make money on cashflow positive companies. however, a lot of cashflow positive companies are really good outcomes for the founders and employees. as a founder, you ought to consider this before raising money.

nikanj 10y ago

The founder team of a default-alive company is in an immensely better bargaining position, and VC naturally prefer the kinds of deals people only sign in distress. It's hard to put the squeeze on people, when they can just decide to take the investment next year instead.

graeme 10y ago

As a bootstrapper with no interest in VC, I can say this rings true. I was never more productive than when I was scrambling to ensure financial sustainability. Once things became comfortable, I slowed down. Partly, this was good: recovering social life, dating, etc. You can't keep up a breakneck pace forever. But, I needing more money was a clear, objective metric that kept me focussed. Once you're default alive you need new metrics.