Default Alive or Default Dead? Runway Math for Small Startups

In October 2015, Paul Graham published a short essay with a question for a title: Default Alive or Default Dead?

The question is simple. Take your startup as it is today. Assume your costs stay where they are. Assume revenue keeps growing at the rate it has grown over the last few months. Now: does revenue catch up with costs before the money in the bank runs out?

If yes, you are default alive. If you do nothing dramatic, you survive.

If no, you are default dead. If you do nothing dramatic, the company dies. Not because anyone made a terrible mistake, but because the numbers were always heading there.

What struck me about the essay is not the idea. Most founders would agree with it. It’s Graham’s observation that many founders he talked to didn’t know the answer. They knew they had “about a year of runway.” They knew revenue was “growing.” They had never put the two together.

This post is about putting them together. We’ll go through the few numbers you need, work a full example month by month, and end with a 15-minute routine that keeps the answer fresh. No finance background needed. If you can use a spreadsheet, you can do all of it.

The words, explained once

Before the math, four terms. They get used loosely, so it’s worth pinning them down.

Gross burn is everything you spend in a month. Salaries, rent, software, servers, ads, your accountant. If $18,000 leaves the bank account in a month, your gross burn is $18,000.

Net burn is what you spend minus what you earn. If $18,000 goes out and $5,000 comes in from customers, your net burn is $13,000. This is the number that actually shrinks your bank balance.

Runway is how many months until the money runs out, at the current net burn:

Runway = cash in the bank ÷ net burn per month

With $120,000 in the bank and a net burn of $13,000, runway is about 9.2 months.

Break-even is the month revenue covers costs. Net burn hits zero. From then on, the bank balance stops falling and starts rising. For a small company this is also called being “ramen profitable,” another Graham phrase: profitable enough to pay the founders’ basic living costs, nothing fancy.

Two warnings about these numbers.

First, people often quote gross burn when they mean net burn, or the other way round. “We burn $18k a month” and “we burn $13k a month” can describe the same company. Always ask which one.

Second, simple runway ignores growth. The 9.2 months above assumes revenue never changes. If revenue is growing, net burn shrinks every month and the real runway is longer. If revenue is shrinking, it’s shorter. That’s exactly the gap Graham’s question fills. Runway tells you how long you have. Default alive or dead tells you whether that’s long enough.

The one question, in one sentence

Here is the version I think every founder should be able to say out loud, without opening a laptop:

“At our current costs and growth rate, we reach break-even in month X, with about $Y left in the bank.”

Or, if the news is bad:

“At our current costs and growth rate, we run out of money in month X, about Z months before break-even.”

That’s it. One sentence, three numbers. If you can’t fill in the blanks, you don’t yet know whether your company is alive or dead by default. You’re guessing.

Graham’s partner at Y Combinator, Trevor Blackwell, built a small online calculator for this, and the essay links to it. You give it your numbers and it tells you which side you’re on. It’s a good tool. But I’d still build the table yourself at least once, because doing it by hand shows you why the answer comes out the way it does. That’s what we’ll do now.

A worked example: Tidybook

Tidybook is a fictional company I made up for this post. It’s a small SaaS (software sold as a monthly subscription) that helps freelancers send invoices. Two founders, one part-time developer, some servers, some tools.

Here are its numbers on day one of our example:

MRR means monthly recurring revenue: what subscribers pay you every month, added up.

Now the interesting part. We don’t know exactly how fast Tidybook will grow, so we’ll try three scenarios. In each one, MRR grows by a fixed percentage every month, and costs stay at $18,000, just as Graham’s question assumes.

• 5% a month. Slow but steady. About 1.8x in a year.
• 10% a month. Solid. About 3.1x in a year.
• 15% a month. Fast. About 5.4x in a year.

Each row below shows that month’s MRR and the cash left at the end of that month. Cash at the end of a month = cash at the start + MRR − $18,000. Numbers are rounded to the nearest dollar.

Read it scenario by scenario.

At 5% a month, Tidybook is default dead. It ends month 10 with $2,889 and can’t pay month 11’s bills. It would need about $6,966 more just to finish that month. MRR is still only $8,144, less than half of costs. Growth helped a little: simple runway said 9.2 months, and growth stretched it to about 10. But it’s nowhere near enough.

At 10% a month, Tidybook is default alive, barely. MRR passes $18,000 in month 15 and the bank balance starts climbing. But look at the lowest point: $7,875 at the end of month 14. That’s less than half of one month’s costs. One big customer leaving, one surprise tax bill, one month of slower growth, and this scenario becomes the first one. Technically alive. Practically, very nervous.

At 15% a month, Tidybook is comfortably default alive. Break-even arrives in month 11, the lowest balance is $41,519 at the end of month 10, and after that the bank account grows fast.

Same company. Same costs. Same starting cash. The only thing that changed is growth, and it decided everything.

The diagram shows something the table hides a little. The lowest point of the cash curve is always the break-even month. Before it, you lose money every month, so the line falls. After it, you make money, so it rises. The whole question is whether the bottom of that curve sits above zero or below it, and by how much.

Check the math yourself

I don’t trust tables I haven’t recomputed, and you shouldn’t either. Here is the whole model in a few lines of Python:

cash0, costs, mrr0 = 120_000, 18_000, 5_000

for growth in (0.05, 0.10, 0.15):
    cash, mrr = cash0, mrr0
    for month in range(1, 61):
        cash += mrr - costs
        if cash < 0:
            print(f"{growth:.0%}: out of cash in month {month}")
            break
        if mrr >= costs:
            print(f"{growth:.0%}: break-even in month {month}, cash ${cash:,.0f}")
            break
        mrr *= 1 + growth

# 5%: out of cash in month 11
# 10%: break-even in month 15, cash $8,862
# 15%: break-even in month 11, cash $43,746

Or in a spreadsheet, with the inputs in cells: starting cash in B1, monthly costs in B2, first-month MRR in B3, growth rate in B4. Put month numbers in column A from row 7 down, then:

B7:  =$B$3                      (MRR, month 1)
B8:  =B7*(1+$B$4)               (MRR, each later month; fill down)
C7:  =$B$1+B7-$B$2              (cash at end of month 1)
C8:  =C7+B8-$B$2                (cash at end of each later month; fill down)
D7:  =IF(C7<0,"OUT",IF(B7>=$B$2,"BREAK-EVEN",""))   (fill down)

Change B4 from 5% to 10% to 15% and watch column D. The first “OUT” or “BREAK-EVEN” is your answer. That one cell, the growth rate, is where most of the drama lives.

Why the answer matters more than it seems

You might think: so what? If Tidybook is default dead, the founders will just raise more money.

Graham’s point is that this plan is much weaker than it feels. In the essay he says investor interest follows growth. If revenue is growing very fast, he gives “over 5x a year” as an example, investors will usually show up even if you’re not profitable. Notice that’s roughly our 15% scenario. At 5% a month, Tidybook is growing about 1.8x a year. That’s real progress for a small business, but it’s not the curve most venture investors are looking for.

He wrote about the bad version of this in an earlier essay, The Fatal Pinch (December 2014). The pinch is a startup with money still in the bank, a big monthly loss, weak growth, and a plan to survive by raising again. In “Default Alive or Default Dead?” he sums it up as default dead plus slow growth plus not enough time to fix it.

Why is raising harder in that position? The pinch essay gives reasons that are easy to recognize:

• You’re spending more than you did at the first raise, so you need more money.
• Investors expect more from a company that has already raised. The bar for a second round is higher than for the first.
• The company now looks like it’s failing. Early on, nobody could tell. A year later, with flat growth, the story reads differently.

Put simply: the worse your numbers look, the more you need investors, and the less they want you. That’s the trap. The founders who fall into it usually didn’t decide to. They just never asked the question until month nine.

This is also why I like asking it early. Graham makes the same point: in the first months the question barely means anything, and later it’s the only one that matters, and the change sneaks up on people. Asking too early costs you a few minutes. Asking too late can cost you the company.

The levers, and what they’re worth

So you build the table and you’re default dead. What can you actually change?

There are only a few inputs in the model: cash, costs, starting revenue and growth. Each lever moves one of them.

Cut costs

The fastest lever, and usually the most painful, because most startup costs are people. But it’s also the most certain. A cost you cut is gone next month. Growth you hope for might not come.

Graham is blunt about the most common cause of this problem in funded startups: hiring too fast. It’s tempting because there’s always more work than people. But extra people rarely fix a product that customers don’t want enough. Often they make it harder to change.

Raise prices

Price is the lever founders forget. If customers stay, a price increase is almost pure profit: the costs don’t change, the revenue does. I wrote a whole post about why small businesses charge too little, and it applies to software too.

Grow faster

The most powerful lever, as the table shows, and the least controllable. Graham’s suggestions here are founder-sized, not budget-sized: doing things that don’t scale, and changing the product in ways only the founders can.

Raise money

More cash doesn’t change the shape of the curve. It moves the whole line up. That can be enough, if the curve was going to turn up soon anyway. If it wasn’t, you’ve bought more months of the same slope. And as we just saw, raising is hardest exactly when you’re default dead.

What the levers do to Tidybook

Let’s take the default-dead scenario, 5% growth, and pull the levers one at a time. Same Python model, different inputs.

A few lessons hide in that table.

No single lever saves Tidybook. Cutting costs buys five months. Raising prices buys one. Neither changes the ending.

Together, they flip the answer. The combination turns a default-dead company into a default-alive one, with no new money and no miracle growth.

A small change in growth is worth a lot. Going from 5% to 7% a month sounds minor. It moves break-even five months earlier and more than doubles the cushion at the bottom of the curve.

One honest caveat: “raise prices 20% and nobody leaves” is optimistic. Some customers will leave. Model that too. Try a 20% increase with 10% of customers leaving and see if it’s still worth it. Usually it is, but check.

Default alive for bootstrapped and side businesses

The essay is written about venture-funded startups, but I think the question matters even more for small businesses without investors.

A bootstrapped company, one funded by its founders and its customers, has no next round to hope for. If it’s default dead, it’s simply dead, on a date you can calculate. The good news is that bootstrapped founders usually feel this in their bones and keep costs low. The bad news is that they often don’t write it down, so they don’t see the date coming.

For a side business, the “cash in the bank” is often your own savings or your salary from a day job. The question becomes personal: at this rate, does the business start paying for itself before I run out of patience, savings, or evenings? That’s still a runway question. It just has your name on it.

A few things change for small, self-funded businesses:

• Your own pay is a cost. If you’re not paying yourself, the business looks more alive than it is. Run the table twice: once without your salary, once with what you’d need to live on. The second answer is the real one.
• Break-even is a better first goal than growth. A small business at break-even can take its time. A small business losing money every month can’t.
• Lumpy revenue needs a bigger cushion. If customers pay yearly, or the business is seasonal, monthly growth rates jump around. Use a three-month average for growth, and keep more cash at the lowest point.

This is part of why, when I think about whether a small startup should raise at all, the first question isn’t “can we raise?” It’s “are we default alive without it?” If yes, you can raise from strength, or not at all. If no, you’re raising to survive, and investors can tell.

A 15-minute monthly routine

You don’t need a finance team for this. You need one sheet and fifteen minutes on the first working day of each month.

The sheet

One tab, one row per month:

Most columns are formulas:

• Net burn = money out − money in.
• Growth vs last month = this month’s MRR ÷ last month’s MRR − 1.
• 3-month avg growth = the average of the last three growth numbers. This smooths out a lucky or unlucky month.
• Runway (simple) = cash at end ÷ net burn. (Leave it blank if net burn is zero or negative. You’re already at break-even.)
• Default? and Break-even month come from a second tab with the projection formulas above, using this month’s cash, costs, MRR and the 3-month average growth.

If you already keep one sheet that runs the business, this is just one more tab.

The fifteen minutes

1. Minutes 1-5: Fill in the facts. Bank balance at month end, total money in, total money out, MRR. Copy from your bank and your billing tool. Don’t estimate.
2. Minutes 6-8: Read the formulas. Net burn, growth, runway. Did anything jump? A big change usually means a one-off payment or a mistake. Find out which.
3. Minutes 9-11: Say the sentence. “At current costs and growth, we break even in month X with $Y left,” or “we run out in month X.” Write it in a notes column. Compare it with last month’s sentence.
4. Minutes 12-15: Decide one thing. If you’re default alive with a thin cushion, what would widen it? If you’re default dead, which lever do you pull first, and by when? Write down the date you’d switch to a survival plan if nothing improves. Graham suggests exactly this: know in advance what you’d do to survive without new money, and when you’d start.

The most useful part of the routine isn’t any single month. It’s the trend in the sentence. If break-even keeps moving further away month after month, that’s a warning long before the bank balance looks scary.

What I take from it

I like this question because it replaces a feeling with a date. “We’re doing fine” and “we’re a bit worried” are feelings. “We break even in month 15 with under $8,000 left” is a fact you can act on.

It’s also a kinder question than it sounds. Default dead isn’t a verdict on the founders. It’s a description of a trajectory, and trajectories can change. Tidybook at 5% growth was dead. Tidybook with slightly lower costs and slightly higher prices was alive. Same founders, same product, a few honest decisions apart.

The only founders who can’t change the answer are the ones who never ask the question.

Key ideas

• Default alive means: at current costs and current growth, revenue overtakes costs before the cash runs out. Default dead means it doesn’t.
• Gross burn is what you spend; net burn is spend minus revenue. Runway is cash ÷ net burn, and it ignores growth, which is why it’s not enough on its own.
• The lowest point of the cash curve is the break-even month. The question is whether that point sits above zero, and by how much.
• Growth decides almost everything. The same fictional SaaS ran out of money at 5% a month, barely survived at 10%, and was comfortable at 15%.
• No single lever usually saves you, but combined levers can. Small cost cuts plus a price increase turned the default-dead scenario into a default-alive one.
• Raising money is hardest exactly when you’re default dead. Don’t make it the only plan.
• Spend 15 minutes a month filling one sheet and saying one sentence: when you break even, or when you run out.

Sources: Paul Graham, Default Alive or Default Dead? (October 2015); Paul Graham, The Fatal Pinch (December 2014); Trevor Blackwell, Startup Growth Tool (the calculator linked from Graham’s essay). Tidybook is fictional; all its numbers were computed with the Python model shown above.

Related: Investors or Independence? When a Small Startup Should Raise, Unit Economics in Plain English, and The One Google Sheet That Runs a Small Business.