You are default alive if current cash lasts until profitability, with expenses held flat and revenue growing at its recent rate. You are default dead if cash runs out first. The calculation below tests both outcomes for the same company, so you can see which growth assumption changes the result.
What is default alive?
A company is default alive when, with expenses constant and revenue growing at its recent rate, it reaches profitability before the money runs out. If the cash runs out first, it is default dead. Paul Graham treats this as the first thing to know about a startup that has been operating for more than eight or nine months.
In Default Alive or Default Dead?, Graham puts it as a question for the founder: does the company reach profitability on the money it has left? He wrote that about half the founders he talked to could not answer.
The test makes two assumptions on purpose. Expenses are frozen, so no new hires are included and no cuts are assumed. Growth continues at the rate you have actually achieved, not the rate in the plan. Future fundraising is left out completely. The essay says that if a company is only alive because investors will save it, the founders should say exactly that out loud.
The essay links to a calculator by Trevor Blackwell that plots the same thing with a revenue growth rate. At the time of writing its security certificate had expired, so this page shows the math directly.
What inputs does the default alive test need?
The default alive test needs four monthly cash numbers: cash in the bank today, monthly expenses, monthly revenue today, and your monthly growth rate averaged over the last three months. The growth rate is the input people get wrong, so work it out as a compound rate from two revenue figures three months apart.
Use a consistent monthly basis for costs and revenue, alongside the current cash balance. The worked examples assume revenue is collected in the same month and expenses are paid monthly:
- Cash in the bank today.
- Monthly expenses: everything that leaves, including costs you have already committed to, such as a hire who has signed.
- Monthly revenue today. For a subscription business this is your MRR, counting annual plans at one twelfth.
- Your monthly growth rate, averaged over the last three months.
The growth rate is the input people get wrong. Work it out as a compound rate from two revenue figures three months apart:
monthly growth = (revenue now / revenue 3 months ago) ^ (1/3) - 1 example: (25,000 / 20,000) ^ (1/3) - 1 = 0.0772, so 7.7% a month
A rate matches the essay, which talks about revenue growth continuing at its recent pace, and it matches Blackwell's calculator. If your revenue actually grows by a similar amount each month, rather than a similar percentage, run it that way as well. Linear growth is the more cautious assumption.
How do you calculate default alive?
To calculate default alive, project forward one month at a time. Revenue grows by the monthly growth rate, expenses stay flat, and whatever revenue does not cover comes out of cash. The company is alive if revenue reaches expenses before cash drops below zero, and dead if cash drops below zero first.
revenue(month) = revenue(previous month) x (1 + growth) cash(month) = cash(previous month) + revenue(month) - expenses alive: revenue reaches expenses before cash drops below zero dead: cash drops below zero first
To build it in Google Sheets or Excel, put the growth rate in F1 and monthly expenses in F2, then:
A2: 0 B2: current revenue C2: current cash A3: =A2+1 B3: =B2*(1+$F$1) C3: =C2+B3-$F$2 fill row 3 down about 36 rows verdict: the first row where B >= $F$2 (alive) or C < 0 (dead)
If you only want to know when the company turns profitable, there is a shortcut. It does not tell you whether the cash lasts that long, so you still need the table:
months to profitability = ln(expenses / revenue) / ln(1 + growth) example: ln(60,000 / 25,000) / ln(1.0772) = 11.8 months
Worked example: default alive
A software company with €400,000 in the bank, €60,000 of monthly expenses and €25,000 of monthly revenue is default alive if revenue was €20,000 three months ago. That is growth of about 7.7% a month, and revenue passes expenses in month 12 with about €183,000 still in the bank.
| Month | Revenue | Loss this month | Cash at month end |
|---|---|---|---|
| 1 | €26,930 | €33,070 | €366,930 |
| 3 | €31,250 | €28,750 | €307,190 |
| 6 | €39,063 | €20,937 | €236,178 |
| 9 | €48,828 | €11,172 | €192,413 |
| 11 | €56,660 | €3,340 | €181,672 |
| 12 | €61,035 | profit €1,035 | €182,707 |
Revenue passes expenses in month 12 with about €183,000 still in the bank. The company is default alive, even though it lost €33,000 in its first month and plain runway (cash divided by today's burn) says 11.4 months.
Same company, slower growth: default dead
The same company is default dead if revenue three months ago was €22,500 instead of €20,000. Revenue today is still €25,000, but the growth rate is 3.6% a month, and cash runs out in month 16, while revenue is still about €16,000 a month short of expenses.
| Month | Revenue | Cash at month end |
|---|---|---|
| 1 | €25,894 | €365,894 |
| 4 | €28,771 | €269,261 |
| 8 | €33,110 | €155,002 |
| 12 | €38,104 | €59,708 |
| 15 | €42,338 | €2,388 |
| 16 | €43,851 | -€13,761 |
Cash runs out in month 16, when revenue is still about €16,000 a month short of expenses. The team, the product and the bank balance have not changed, and the verdict has. For this company the line sits at about 4.3% monthly growth. Above it, default alive. Below it, default dead.
How do you use default alive to test a decision?
Rerun the default alive calculation before a decision and see whether the verdict changes. In the example, one hire at €9,000 a month keeps the alive company alive, while two hires costing €15,000 a month together turn it default dead.
Take the alive company and add a hire at €9,000 a month from today. It stays alive, reaches profitability in month 14 and has about €73,000 left. Add two hires costing €15,000 a month together and it becomes default dead: cash runs out in month 13. The question "can we afford this hire?" gets a precise answer: one yes, two no, at the current growth rate.
Now take the dead company. Cutting €3,500 a month from expenses gets it to profitability in month 24 with about €2,000 left, which is too thin to count on. Cutting €8,000 a month, to €52,000, makes it default alive: profitable in month 21 with about €98,000 in the bank. Raising growth from 3.6% to 4.3% does the same job, if you know how you would do that.
Graham's essay is blunt about which decision matters most: "Hiring too fast is by far the biggest killer of startups that raise money." The hire test above is the arithmetic version of that sentence.
Mistakes that flip the answer
Five input mistakes flip the default alive verdict: taking the growth rate from your best month, leaving out committed expenses, counting the next round, using bookings instead of cash, and asking too early. Each one moves the projection away from the company's real position.
Taking the growth rate from your best month. One strong month can double the rate you plug in. Use three months, and if the last quarter included a one-off deal, take it out.
Leaving out expenses you have already committed to. The essay freezes expenses at their current level, but a signed hire or a new office lease is already part of that level. Put commitments in, leave hopes out.
Counting the next round. Money you expect to raise does not go in the cash cell. If the only way the company survives is a raise, the answer is default dead, and the plan is a fundraise with a deadline.
Using bookings instead of cash. A signed contract that pays in 60 days is not revenue in this month's row. Annual prepayments need their receipt dates in a cash-timing forecast. One twelfth of an annual contract is a normalized monthly revenue rate, as used in net burn, rather than a new cash receipt every month.
Asking too early. Before real revenue there is no growth rate to project, and the question does not mean much. Graham suggests starting to ask too early rather than too late, because the danger is realising you are default dead when there is no longer time to fix it.
What should you do if you are default dead?
If you are default dead, you have three moves, and they can be combined: grow faster, spend less, or raise with a date. Only count growth you can explain, such as a price change or a channel that is already working. Raising prices is often the quickest lever.
Spend less: find the expense level at which your current growth reaches profitability in time, then decide whether the company still works at that size (cutting costs without cutting muscle covers how to choose). Or raise, with a date: work out your run-out month, subtract the time a round takes, and decide in advance what you will cut if the round has not closed by then.
In The Fatal Pinch, Graham describes where default dead companies end up when they wait: high burn, mediocre growth, and investors who are less interested the more the company needs them.
If you are default alive
If you are default alive, rerun the projection before every hire and every big commitment. Two hires turned the example company dead. Being default alive also means a raise is optional, and you can decide how much runway a round should buy on your own schedule.
Where Plainhub fits
Plainhub's runway figure is cash divided by net burn at today's revenue, with no growth assumed. For a growing company that is the cautious number: if Plainhub shows 11 months and your growth is real, the default alive projection will come out longer.
The growth projection itself is a spreadsheet job, and the table above is all it takes. If you would rather not maintain it by hand, a live model in place of the copyable sheet recomputes runway when the inputs change. What Plainhub does add on top is the decision test: put a hire on the Plans page as a draft and you see runway and the cash-out date with and without it before you commit.