Default alive

A default alive business does not need to raise money to survive, so it can choose its next move. It can take funding when the terms suit, or none at all. A default dead one will have to raise, cut costs or grow faster, whether or not the founders have admitted it.

The test also changes behaviour. It asks founders to turn a feeling about the business into a projection with a date, which makes trade-offs concrete. Hiring two people is no longer "affordable"; it moves the month the business breaks even, and either that month still sits inside the cash or it does not.

Skipping the projection lets a team feel busy right up to the day the account empties. A business that is default dead needs time to fix it, and raising money from a weak position usually costs more than acting a few months earlier.

• Project current growth and current spending forward with no assumed funding.
• Find the month revenue meets costs, then add up the monthly shortfall until then and compare it with the cash.
• Rerun the projection every quarter.
• If the answer is default dead, decide now: cut costs, raise growth or plan a raise on purpose.

Paul Graham, co-founder of the startup investor Y Combinator, popularised the term in a 2015 essay. His test is simple: if the company keeps growing at its current rate and spending on its current pattern, will it become profitable before the money runs out? If yes, it is default alive. If no, it is default dead, and something has to change.

The test looks at a trend, not at this month's bank balance. A business with healthy cash can be default dead if growth is slow, and one with little cash can be default alive if growth is quick.

• Assuming a spike in growth will continue.
• Counting money from a future raise as if it were already there.