Default Practical

Default Practical
Default Practical

The chill in the venture ecosystem is compelling a change in fundamental focus by entrepreneurs who want to succeed.

In the go-go days of the past few years, the watchword for success has been growth. Startups that didn't grow like topsy had trouble getting attention from Series A VCs. Revenue was considered as an endgame, if at all. The mantra was: Get Big Fast or Go Home.

But now, with Series A and later-stage VCs bundled in their covers, stricken by mammoth post-heyday hangovers, committed fervently to doing as little as possible, those presumptions have been suspended. As a result, A rounds will take much longer to get, require greater proofs and will come at lower values. Many companies that would have snagged Series A on momentum alone in 2014 may go begging at the trough in today's new drier investment environment.

Today, the watchword for startups must be: survivability. Companies must still grow to succeed, and they will. But that growth must come with plans for stability and long-term existence. And, taking that reality one step further, that means growth must now come with revenue. No more growth for growth's sake. Now, growth only makes sense as a means to get the money necessary to keep the lights on.

Paul Graham of Y Combinator has written about a stark question they are now using to test their startup CEOs: Are you Default Dead or Default Alive? Default Dead means the company's revenues are lower than current expenses and won't reach break-even on the money currently in the bank. Default Alive means the company is either cash flow break-even or will be on the money it currently has.

Trevor Blackwell, an AI expert and YC partner has even built a useful calculator for tracking that gap and showing startup CEOs how much new capital they will need to knit it up.

At Social Starts, we began counseling our companies to focus on survivability many months ago. And we believe Graham's dichotomy oversimplifies the complexities of startup growth and attractiveness to investors. In our case, the biggest change hasn't been what we ask of our startups but what we ask ourselves.

In today's tough investment market, we now ask ourselves the following question before we undertake any investment. We call it “The Survivability Test”:

Can this team, at this time, with this product/technology and the money currently being raised, achieve profitability?

If not, can this team at least produce operating metrics so stellar as to be utterly compelling to next-raise investors, and achieve profit with the money from that next raise?

The result of this, of course, is investment in businesses, that while they may not shoot up like rocket ships, have the power to navigate their way to stability quickly and without great heaps of investment capital. In other words, real lunch-bucket businesses.

So, we would add to Paul Graham's life/death dichotomy our third universal option, drawn from our years as startup operators and our experience working with thousands of companies. What we are looking for now is:

Default Practical.