November 30, 2022

Default Alive or Default Dead?

A summary of one of our favourite blog posts from Paul Graham

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Paul Graham is an American computer scientist, essayist, entrepreneur, venture capitalist, and author. He is best known for his work on the programming language Lisp, his former startup Viaweb, cofounding the influential startup accelerator and seed capital firm Y Combinator, his essays, and Hacker News.

Let's explore the most important takeaways.

Default Alive or Default Dead?

Graham suggests that the founders should know if their startup is "default alive" (on track to profitability) or "default dead" (not on track to profitability). This knowledge impacts how they should approach growth, fundraising, and potential pivots.

Why Founders Don't Know

Many founders do not know whether their startup is default alive or default dead because they are not used to asking that question. Graham proposes that they start asking this question early in the startup's life to avoid the "fatal pinch" - default dead, slow growth, and not enough time to fix it.

Relying on Fundraising

Many founders assume it will be easy to raise more money, which can be a false and risky assumption. Graham advises separating facts from hopes and preparing for scenarios where additional funding may not be available.

Growth vs. Operating Cheaply

Many founders believe there is a trade-off between fast growth and operating cheaply. However, Graham argues that there is little connection between the two. Startups grow fast when the product meets a significant need, while startups spend a lot when the product is expensive to develop or sell, or when they are wasteful.

Avoiding Default Dead: Don't Hire Too Fast

Hiring too fast is the biggest killer of startups that raise money. Founders tend to overestimate their need for more employees, often encouraged by their investors. Over hiring leads to high expenses, slow growth, and unappealing prospects for further investment.

Address the Fundamental Problem

If a startup is experiencing slow growth, it is essential to address the fundamental problem (usually an unappealing product) instead of trying to hire more people. Founders should focus on evolving the product rather than merely "building it out."

Ask the Right Questions

Knowing whether a startup is default alive or default dead can help counteract the forces that push founders to overhire. It forces them to explore other paths to growth, like doing things that don't scale or redesigning the product in ways only founders can. This approach has proven successful for startups like Airbnb, which grew into a highly successful company by focusing on evolving its product before hiring more employees.

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