
Default Alive or Default Dead? - iamwil
http://paulgraham.com/aord.html
======
JshWright
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...

~~~
clamprecht
Here's an interesting thought in response: (Keep in mind I know jack about
rope rescue, so I'm making assumption as to what it is)

Imagine you had 100 people do a "rope rescue race". Half of them used all the
safety mechanisms (they would pass the "whistle test"). The other half didn't
use any safety/redundancy (they would fail the "whistle test"), but instead
relied on their skill. In the end, it's likely that a few of the high-risk
ones would die. But it's also likely that many of the high-risk ones would
survive, and also that they would be the winners of the race. The safer, lower
risk ones would eventually get there, but far behind the high risk ones.

Startups are the high-risk ones.

~~~
justinator
That's psychotic.

I don't rope rescue, but I sure do rock climb. You can rock climb with ropes
or without. Ropes = a large safety margin, and the majority of people who
climb, utilize them, as part of their safety system. Unless you're pushing
your own grade level, the actual safety system isn't actuated - you're just
using it "just in case" (like, "just in case you fall from a cliff, 500 feet
up - gee it's nice I'm tied to something).

There are also those who climb without ropes. Perhaps you've heard of some of
them [0], and most likely, because they actually climb without a rope. High
Risk. Your idea of startups, let's say.

But that's just what the public sees. The free soloist has to be absolutely
comfortable to go without the safety margin of a rope. Because of that, the
majority of their climbing is done, still with a rope. When they go ropeless,
the climbs they do are much, much easier. Yes, the risk is there, but also
there is the understanding, clearly, what the risk is really about.

The death rate of climbers that are unwilling to _ever_ use a rope, because
they find that high risk = high reward would be close to 100%. But those who
do survive are not going to be doing too well - they're never going to
progress.

So, perhaps startups have this illusion of high risk, but maybe also they're
also kidding themselves. They're burning through their lives, and offloading
the real risk onto their safety systems - whoever is putting up the money. And
they can do that (the investors), as they've diversified their portfolio
enough that risk is spread around.

[0]
[https://www.youtube.com/watch?v=SR1jwwagtaQ](https://www.youtube.com/watch?v=SR1jwwagtaQ)

~~~
khetarpal
Reminds me of this: Make the climb like the child did - without the rope.

[https://www.youtube.com/watch?v=KXxw-
zXRqOs](https://www.youtube.com/watch?v=KXxw-zXRqOs)

The rope makes you weak!

~~~
fsloth
The same movie also lets the protagonist heal from a incapacitating spinal
injury in a dusty pit -

So I'm not sure if this is a pro- or anti-rope statement :)

------
jacquesm
> 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
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
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
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.

~~~
Retric
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
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.

------
numlocked
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
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
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.

------
paulsutter
> 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.

~~~
roasm
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
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".

------
7Figures2Commas
> 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_
TarSnap and Pinboard are my favourite examples of businesses that don't need
VC to succeed.

~~~
chubot
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
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.

~~~
chubot
They have raised, but they didn't raise until they were profitable -- that is,
WELL past "default alive". They are remarkably different in this respect than
essentially every YC startup.

Pretty sure Fog Creek has never raised either, while having 50-100 employees.

The overall point is that you don't have to be a one-person business to grow
at a slower but "healthy" rate.

~~~
ghufran_syed
Interesting that Joel Spolsky himself wondered if this might be a bad thing:
[http://www.inc.com/magazine/20091101/does-slow-growth-
equal-...](http://www.inc.com/magazine/20091101/does-slow-growth-equal-slow-
death.html)

------
analog31
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.

~~~
stephengillie
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
> 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.

------
rsp1984
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.

------
caf
_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
Nice way of framing it, clicked a couple of things in my head.

------
Multiplayer
I love that calculator. Picture is worth 1,000,000 words here.

------
jaytaylor
Why is there a shopping cart in the upper right hand corner of his website?
What Is available for purchase from Paul?

~~~
NhanH
Where did you see the shopping cart? I have never seen it and still don't even
now (after looking for it)

~~~
x1798DE
It's in the upper right hand corner on mobile.

------
kra34
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
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
[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
Which seems like BS, since WhatsApp obviously didn't need strong financials to
be acquired for an amazing amount.

------
Animats
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)

------
codingdave
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
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.

------
AndrewKemendo
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.

------
debacle
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
I wonder what all these people are doing. Browsing HN, probably.

------
logicallee
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.

------
copsarebastards
> 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.

------
DrNuke
Bootstrapping attitude to the rescue: the more you do with little money, the
more you can do when money is raised, and longer.

------
vasilipupkin
Aren't most startups except for very very few super start top ones, default
dead by definition, maybe until B stage?

------
TrevorJ
Reminds me of a great episode of Dirty Jobs:
[https://www.youtube.com/watch?v=Ap3peqZ0RlA&feature=youtu.be...](https://www.youtube.com/watch?v=Ap3peqZ0RlA&feature=youtu.be&t=85)

------
urs2102
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"?

------
PhilipA
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
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".

