Default Alive

A startup has cash in the bank but spends more each month than it earns, while its revenue is growing. The founder projects month-by-month revenue and spending to see whether the business reaches break-even before cash runs out.

Paul Graham framed the test around current cash, roughly constant expenses and recent revenue growth, warning against assuming fundraising will always be available, and Startup Super School explains the term and its path-to-profitability interpretation. Start with actual cash, excluding promised investment that has not arrived and funds unavailable for operations, because debt obligations can change the usable amount.

Measure current revenue, remembering that recurring revenue, one-off projects and unpaid invoices have different predictability and collection timing. Measure monthly spending too, including payroll, suppliers, infrastructure and other cash obligations, not only a headline burn figure.

Find a defensible growth trend, since one promotional month may not represent a lasting pace and several months and customer cohorts should be examined. Project monthly cash by subtracting expected net outflows each period while revenue and costs change, because a flat burn-rate runway can mislead as revenue rises.

Identify break-even correctly, as accounting profit and cash-flow break-even can differ due to collection and payment timing, so state which target is used. If projected revenue covers recurring costs while cash remains positive, the business may be default alive under those assumptions.

Model variable costs, as revenue growth can increase hosting, delivery, support or sales expenses, and check working capital, since a profitable order can still consume cash before a customer pays. Inspect renewal risk too, because contracts can expire before the projected break-even date, changing the revenue base.

Do not treat the answer as permanent, since new hires, churn, price cuts or slower growth can move the company back into a default-dead scenario. Run a downside case, such as slower growth or a large customer leaving, because a narrow margin before cash exhaustion is fragile.

Model hiring carefully as well, since a role that helps growth can also raise burn now, and keep a buffer so that cash exhaustion and profitability do not arrive in the same month. Keep fundraising separate, because a likely future financing round may be a plan but it does not make the current operating trajectory default alive.

Separate approved cost actions from hoped-for savings, and update the answer often rather than freezing it in a pitch deck. Default dead is not failure and default alive is not safety: each describes the present projection, and for an owner the point is to make a hidden dependency explicit and know how much time remains if new money does not arrive.