Understanding the Concept: Default Alive or Default Dead?
When examining startups that have been operating for more than eight months, a crucial question often emerges. Will they reach profitability given their current revenue growth and expenses, or are they bound to perish? The surprising truth is that many founders themselves are uncertain about their startup's status - whether it's default alive or default dead.
The Importance of Knowing Your Status
The reason for wanting to ascertain a startup's status immediately is that it determines the course of the conversation. If the startup is default alive, the discussion can revolve around new ambitious projects they can undertake. If it's default dead, the topic of conversation will likely be about the ways to save the startup from its impending doom.
Why Founders Often Don't Know Their Status
The main reason founders are unaware of their status is because they simply aren't accustomed to asking that question. It's not a question that seems relevant in the early stages, much like asking a three-year-old how they plan to support themselves. However, as the startup matures, this question becomes vital. The sudden shift in relevance often catches founders off guard.
The Solution: Ask Early
Instead of waiting until it's too late to question whether you're default alive or default dead, it's advisable to start asking too early. The dangers of worrying too late far outweigh the dangers of worrying too early.
The Fatal Pinch
The fatal pinch is a phenomenon that occurs when a startup is default dead, experiencing slow growth, and lacks the time to rectify the situation. Founders often find themselves in this situation because they fail to realize the direction they're headed in.
False Hope in Fundraising
Another reason founders fail to question their status is the assumption that they can easily raise more funds. However, this assumption is often incorrect, and the more a startup depends on it, the falser it becomes.
Separating Facts from Hopes
Instead of viewing the future with vague optimism, it's crucial to distinguish between fact and hope. Recognising that "we're default dead, but we're counting on investors to save us" may trigger the necessary alarm bells. This early realisation can help avoid the fatal pinch.
Counting on Investors
Depending on investors for survival is a risky gamble. Investors' interest is usually a function of growth. If a startup demonstrates steep revenue growth, investors may show interest even if the startup isn't profitable. However, investors can be fickle, and any aspect of a startup's business can deter them, regardless of its growth. Therefore, it's crucial to have a backup plan.
Fast Growth vs. Operating Cheaply
The assumption that fast growth necessitates higher spending is often incorrect. There is little correlation between a startup's expenditure and its growth rate. When a startup grows quickly, it's usually because the product meets a significant need. When a startup spends a lot, it's often due to the high cost of product development or sales, or simply wastefulness.
The Killer of Startups: Hiring Too Fast
The quickest way to kill a startup is by hiring too fast. Startups often make the mistake of overestimating their hiring needs. The reasons for this include the assumption that a larger team will get more work done, the perception that successful startups have large teams, and the refusal to acknowledge that the product may not be appealing enough.
The Perils of Overhiring
VCs often encourage startup founders to overhire. While this strategy may work for VCs, it is not in the best interest of the founder, whose primary goal is to survive.
How Startups Die
A common way for startups to die is by making a moderately appealing product, experiencing decent initial growth, and then overhiring in the hope of boosting growth. When growth doesn't come, they rapidly run out of funds and become unappealing to investors. The better course of action would have been to address the fundamental issue - the moderate appeal of the product.
Evolving the Product
Instead of hiring more people to 'build out' the product, it's often more beneficial to evolve the product, which is usually easier with a smaller team.
The Importance of Growth
Asking whether you're default alive or default dead may help avoid overhiring and instead compel you to seek growth in other ways. These alternative paths to growth are often the ones that actually work.