पाठशाला Pathshala · हिसाब Hisāb, Unit economics · Lesson 28 · Scale
The path-to-profitability memo
Two pages that take a company from today’s burn to breakeven: the month, the cash it costs and the three operating assumptions that must hold, with the triggers that show one failing.
Pathshala, The Founder Library · 11 October 2026 · 7 min read
At some point every board asks the same question in different words: when does this company stop needing our money? A founder who answers with a slide of rising revenue has not answered it. The answer is a month, a sum of cash and a short list of things that have to be true, written down where the board can check them every month until the month arrives.
This lesson sets out what the memo is for, how to measure the burn it starts from, the three assumptions that carry it, the arithmetic of the path, the triggers that show it failing, the two-page format, and the monthly check that turns the memo into a management tool rather than a fundraising document.
What the memo is for
Paul Graham’s Default Alive or Default Dead? asks whether a company makes it to profitability on the money it has left, assuming expenses stay constant and revenue keeps growing as it has over the last several months. The memo is the long form of that question. It does three jobs. It tells the founders whether the current plan reaches profitability before the cash runs out. It tells the board and investors which assumptions the answer rests on, so that disagreements are about those assumptions rather than about optimism. And it gives the team a short list of numbers that decide the company’s independence.
Graham’s warning is that the fatal pinch is default dead plus slow growth plus not enough time to fix it, and that the risk lies in starting to worry too late. A memo written when there are eighteen months of cash has room for choices that a memo written at six months does not. Write it once a year at minimum, and immediately after any fundraise, while the cash is at its highest.
Start from the burn you actually have
The starting number is net burn: cash out less cash in, for the last three months, from the bank statements. Andreessen Horowitz’s 16 Startup Metrics calls net burn the true measure of the cash a company is burning every month, and it is the number investors use to estimate how long the money lasts. Gross burn, all cash out, is useful for knowing what could be cut. Net burn is the one the memo starts from.
Split it into its two parts. Gross profit is revenue less cost of revenue, ex-GST. Operating cost is everything below that line: salaries outside delivery, rent, marketing, tools, professional fees. Breakeven is the month gross profit covers operating cost. Writing the path in these two lines rather than as a single burn number shows where the work is: a company can reach breakeven by growing gross profit, by holding operating cost or, usually, by both. The [operating leverage lesson](/library/break-even-and-operating-leverage) explains why the second line tends to grow more slowly than the first.
The three assumptions that have to hold
Almost every path to profitability rests on three numbers. Monthly revenue growth: not the year-end target, but the compound monthly rate the plan requires, which is easier to compare with what the company has actually done. Gross margin: the level the company reaches and by when, with the levers named; the [margin levers lesson](/library/gross-margin-expansion-five-levers) shows how to size them. Operating cost growth: the monthly rate at which salaries, marketing and overhead rise, which in practice means the hiring plan.
Everything else in a detailed plan is a consequence of these three or a detail beneath them. Writing them as three numbers makes them testable. A founder can say that revenue has grown at 5 per cent a month for the last six months and that the plan assumes the same; the board can see whether that is conservative or heroic. The memo is credible when each assumption is within the range the company has already achieved, or when the change needed is named with an owner and a date.
The path, month by month
A Bengaluru company sells software to clinics. It makes ₹50 lakh of revenue a month at a 55 per cent gross margin, spends ₹70 lakh a month on operating cost, and so burns ₹42.5 lakh a month. It has ₹10 crore in the bank. The plan assumes revenue grows 5 per cent a month, gross margin reaches 65 per cent within a year through cheaper infrastructure and self-serve onboarding, and operating cost grows 1 per cent a month.
On those assumptions gross profit crosses operating cost in month 20. The company burns ₹4.6 crore on the way and its balance never falls below ₹5.4 crore. That is the memo’s headline: breakeven in month 20, ₹4.6 crore to get there, a cushion of more than half the cash. Now test each assumption. At 4 per cent monthly growth breakeven moves to month 27 and costs ₹6.2 crore. If the margin stays at 55 per cent it moves to month 25. If operating cost grows at 2 per cent it moves to month 27. If growth is 4 per cent and cost grows at 2 per cent, the lines never cross in three years and the cash runs out in month 29.
The test shows which assumption the plan is most sensitive to and how much margin for error the cash gives. Here a one-point miss on growth costs seven months and ₹1.6 crore, and two moderate misses together end the company. The memo should say so in a sentence. The burn multiple, David Sacks’s ratio of net burn to net new ARR, is a useful cross-check on the growth assumption: a company burning far more than it adds in recurring revenue will find a 5 per cent growth rate expensive to sustain. The [burn multiple lesson](/library/burn-multiple-and-the-discipline-of-efficient-growth) covers the benchmark.
A path to profitability is not a forecast. It is three assumptions, the month they produce and the trigger that will tell you, early, that one of them is wrong.
What would make it fail
For each assumption the memo names a trigger and an action. The trigger is a number and a date at which the assumption is visibly failing: three consecutive months of growth below 4 per cent, gross margin below 58 per cent at month six, operating cost more than 5 per cent over plan in any quarter. The action is what the company will do: cut the marketing spend that is not returning, defer the next five hires, raise prices on renewals, start a bridge conversation.
Graham’s advice applies directly: keep a written plan B, including when to switch to it. A trigger agreed in advance removes the hardest part of a cut, which is deciding that it is time. Sequoia’s 2022 talk to founders, Adapting to Endure, described the discipline as confronting reality and acting decisively to adapt. A memo with triggers lets a company act on reality the month it appears rather than the quarter after.
Writing it on two pages
Page one carries the answer. A first paragraph with the four numbers: net burn today, the breakeven month, the cash burned on the way and the lowest balance. A table of the three assumptions with three columns: what the company has achieved in the last six months, what the plan assumes, and what has to change to get from one to the other. A short paragraph on the sensitivity: which assumption moves the month most, and the combination of misses that the cash cannot survive.
Page two carries the management. For each assumption, the owner, the levers, the trigger and the action. A line on the cash: the cushion at the lowest point, expressed in months of burn, and the date by which a fundraise would have to start if the triggers fire. A line on what the plan does not include: a new product, a new city, an acquisition, each of which would need its own memo. No adjectives. A reader should be able to reproduce every number from the inputs in the table.
The monthly check against the memo
On the fifth working day of each month, after the books close, put actuals beside the memo for the three assumptions and the four numbers: growth this month and trailing three months, gross margin, operating cost, net burn, cash. Re-run the path from the new starting point and record whether the breakeven month moved and by how much. Check each trigger.
Send the board one line each month: breakeven month as of today, and the change since last month. If a trigger fires, the action it names starts that week, and the board hears about it in the same note. Rewrite the memo in full once a year and after every fundraise. A company that runs this check for a year will know, months before anyone else, whether it is default alive, and will have already acted if it is not.
Nothing here is legal, tax or investment advice. The Bengaluru company is illustrative; its figures are the figure’s defaults so that every number in the text can be reproduced.
Sources
- Paul Graham, Default Alive or Default Dead?, October 2015 — Whether a company reaches profitability on the money it has left; the fatal pinch; keep a written plan B.
- Jeff Jordan, Anu Hariharan, Frank Chen and Preethi Kasireddy, 16 Startup Metrics, Andreessen Horowitz, August 2015 — Net burn as the true measure of cash burned each month.
- David Sacks, The Burn Multiple, Sacks Substack — Burn multiple equals net burn divided by net new ARR.
- Sequoia Capital, Adapting to Endure, June 2022 — Confronting reality and acting decisively to adapt in a downturn.