Startups: You're Not Really Ramen Profitable, You're Ramen Sustainable

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Startups: You're Not Really Ramen Profitable, You're Ramen Sustainable

 

A new phrase entered the startup vocabulary a little while ago: “Ramen Profitable”. The phrase is used to reference startups that are making enough money for the founders to live on the startup staple of Ramen noodles. [For our friends in India, Ramen noodles are similar to what you would know locally as “Maggie”, which is what I grew up on. I like the Masala flavored one].ramen

So, here's my issue with the term “Ramen Profitable” — in most cases where it's being applied, the company's not really profitable. Reason? Because the entrepreneurs/founders are paying themselves negligible (if any) salary. This distorts the actual value being created. Some of you might argue that founder's are simply making an investment of their time/energy, in lieu of salary. That's a wonderful thing, but from an accounting perspective, just because you're not properly calculating expenses, doesn't mean it's profit. To be fair and more accurate, founders should look at their fair market value to determine actual profitability.  

For example: Lets say you happened to inherit some prime real-estate in downtown San Francisco. You got it for free. Now, you open a really swank gelato bar for Python developers. If you weren't charging yourself any rent for that space, nor paying yourself anything, and the business made $100/day, would you really consider that profitable? You could have rented the space out at fair market value for much more money than that.  I'd argue you're losing money -- and I'd be right.

My point: It's awesome for startups to get to a point that they're not reliant on external funding sources to survive. Paul Graham describes this well in "Ramen Profitable".  Great article and I agree with his points -- particularly around the morale boost.  But, I'd call this stage of a startup “Ramen Sustainable”. This stage gets a startup “infinite runway”. This can be a very good thing, because the entrepreneur can than tweak, iterate, pivot to her heart's content. But, that's also the problem with Ramen Sustainable startups. The entrepreneur may keep going longer than would have been warranted, instead of moving on to their next big idea.  

Oh, and on a closing note (which came up in discussion as a result of an article by Scott Kirsner (of the Boston Globe), titled “Is Boston spawning too many startups, and starving growth companies for talent?” My thoughts on this:

You can never have too many startups, but you can have too few shutdowns.

Do you think I'm right about the Ramen Sustainable vs. Ramen Profitable characterization? Any thoughts on the pros and cons of reaching this stage in a startup?  How do you know when your Ramen Sustainble startup is better off being shutdown so you can move on to bigger things?

Posted by Dharmesh Shah on Fri, Oct 21, 2011

COMMENTS

While I'm sure the idea of being able to run forever sounds fantastic to anyone struggling to figure out what to do next month, I agree that it quickly becomes detrimental to moving up or moving on.  
 
 
 
Having moved from corporate to startup recently, it seems as fairly reasonable, even common, to leave a professional role and walk into this level of success, either through bringing in known customers [i.e. leaving to start with business] or through a secondary supporting [i.e. you're a great developer with minimal costs and can consult to cover them with little time drain].  
 
 
 
But as you put it, you risk going nowhere. Having a timeline to build, validate, and improve and then gain traction for an idea gives you the requirement to drive hard and yet the benefit of a path. With unlimited run room it’s too easy to postpone both the hard parts and ignore the reality of your situation. Pressure isn’t just good for productivity, it forces you to keep moving until you find success, in whatever form.  
 

posted on Friday, October 21, 2011 at 11:12 AM by Ted Sindzinski


An entrepreneur has to quickly learn to finely balance between the roles of an executive vis-a-vis that of an entrepreneur. 
Start-up can never be a path of charity. 
This is a business organization and has to be managed like one. Sooner the better!

posted on Friday, October 21, 2011 at 11:52 AM by Ashok Vaishnav


Rather than having too few shutdowns, I'd suggest you can have too few failures within a single enterprise.  
 
If you're truly experimenting and testing, you should have a decent number of failed hypotheses (along with the successes). Startups by their nature should be highly flexible and adaptable - the start-up/shut-down costs (legal, personnel, PPE) make it more cost-effective to experiment within an organization rather than experiment with a number of separate organizations, just to see which one flies. If you jettison the team, you're losing all that valuable learning you've accumulated through this process. Hang on to the team and the company and iterate until you get it right.

posted on Friday, October 21, 2011 at 12:06 PM by Ehren Brav


Loved the "Maggie" reference. :-)

posted on Friday, October 21, 2011 at 12:24 PM by Jigar Patel


Dharmesh, 
 
 
 
I think you make an excellent point. “Ramen Profitable” seems to be in vogue from a terminology stand point today and while it’s a great early stage goal, it doesn’t typically factor in the founders ‘s opportunity cost. I’m not sure “Ramen Sustainable” will ever become a catch phrase replacing “Ramen Profitable,” but we’d all do a better job allocating our finite resources if we factor in the opportunity cost. 
 
 
 
As an entrepreneur of a four years old venture the distinction you raise rings clear. We are “Ramen Profitable” but not yet “Ramen Sustainable.” As to whether it’s time to throw in the towel and allocate our time to another venture… Nope, net yet :-) 
 

posted on Friday, October 21, 2011 at 1:40 PM by Ron clabo


You're absolutely right about 
 
"Ramen Sustainability".  
 
Any form of feedback can be construed as positive and used as proof that one is on the right track. It seems like this is pretty much human nature.  
 
 
 
When to move on? I guess it would depend on what kind of entrepreneur you are? Give up too soon or give up too late? No real way of knowing. So move on when you're sick and tired of Ramen. Sooner for some, later for others.

posted on Friday, October 21, 2011 at 1:43 PM by Michael Chapman


I agree with you Dharmesh, speaking from experience. 
 
We have waited too long to move on because the result was mediocre and it was bringing in some income. But deep down inside we know it would not 'fly'. 
 
So, yeah I agree and this is the same 'logic' for mediocre project ...

posted on Friday, October 21, 2011 at 2:08 PM by Denny


Dharmesh,  
 
Great article. As an accountant, I have seen many small businesses fail an inch at a time. The owners took little or no salary, living on savings or the grace of a spouse or parent's financing or credit. Start up owners (as well as most business owners) are an optimistic lot. They also have to be realistic enough to make the changes needed to either close or grow a business. Being stuck at the "Ramen Profitable" stage is a receipt for disaster. Of course, the art to business is knowing when you are stuck and when you are close to a breakthrough.  
 
Take care. 
Linda Lewis-McKee

posted on Friday, October 21, 2011 at 2:23 PM by Linda Lewis-McKee


Good point, I agree with you overall. Ramen Sustainability could rob a startup of it's drive. 
 
I do have a tiny quibble with your example of the Python gelato bar. I agree that for a startup (i.e. a business), you're not really profitable until you're paying people what they're worth and accounting for it, but the scenario you posit is more a personal indulgence, and there I'd say that failing to maximize revenue and losing money are not the same. Opportunity costs are only a cost if you care about the missed/passed opportunity. If the opportunities you don't pursue are things you don't care about, then they're not a cost. The gelato bar owner doesn't care about maximizing profit, he wants to create a cool hangout for engineers and have it be self-sustaining, and he's achieved what he set out to do. He's not losing anything.

posted on Friday, October 21, 2011 at 2:26 PM by Tim Janke


I agree with you about the Ramen Sustainable vs. Ramen Profitable characterization. However, I do not agree with closing shop and move on to the next big thing, at least startups shouldn't give up too soon if something doesn't seem to be working, I don't like quitting.  
 
If your startup is not profitable yet but you are gaining traction then you should wait a little longer. In other words, if your company already has paying customers, perhaps you should work harder to increase the number of paying customers instead of moving on to your next bug thing. With patience, this ramen sustainable company could become ramen profitable and then the next great thing! Great companies take time to build. 
 
Cheers, 
 
Ricardo.

posted on Friday, October 21, 2011 at 6:13 PM by Ricardo


Nice to have finaly a word - Ramen Sustainable - for the situation I was in for the last three years! Strangely enough, as I felt there was something wrong, my accountant office and mentors in business (as one is advised to get when starting up a business) did not seem to care at all when I mentioned the symptomes of Ramen Sustainable. I called for help, but did not get any advice that suited me and my private situation. Feel very dissapointed about this. Perhaps leaders in business, accountants and bank who are set up to help (young) entrepreneurs should be informed more about how to recognize Ramen Sustainable and what to do with it. Again, thanks a lot Dharmesh to shet light on this very important issue as I believe most enterpreneurs want to be(come) Ramen Profitable.

posted on Friday, October 21, 2011 at 7:56 PM by Brigit Law


I agree with your point, but thing you rewording is worse than the original. It's *not* sustainable because nobody can live on ramen for years (as other commenters point out).

posted on Friday, October 21, 2011 at 7:57 PM by Bill Seitz


Dharmesh, 
 
Playing a little devil's advocate: 
 
1) Calculating your value - 
How do you decide what you're worth? You could maximize your salary at a big company, but would never consider it. Even startup employees often work slightly below market rate. 
 
2) What makes you happy? 
If creating your own thing is what you love, should we stop them? Do we tell all the "starving artists" to go get a job? 
 
3) How do you tell when to give up? 
We wouldn't have AirBNB if they gave up during their long trough of sorrow (were they even ramen sustainable in that painful period?)  
 
Perhaps a great future post would be "signs it's time to shut down" but perhaps written by someone who has done it a few times (as far as I know, you've been only successful). 
 
Thanks, 
Jason

posted on Saturday, October 22, 2011 at 12:38 AM by Jason Evanish


In essence, your point, a valid one, is that when determining "Ramen Profitability" founders should also take into account the opportunity cost of their salaries/FMV. This is mostly right, except for those cases, when founders may be valuing intangible benefits coming from the startup, whether or not they earn their FMV.  
 
Such intangible benefits could be better control of their own time (lifestyle entrepreneurship) or ability to pursue a particular creative passion via a startup.

posted on Saturday, October 22, 2011 at 5:23 AM by Yogesh M. Pathak


Interesting posts. I'm struggling with this now. Being truly ramen profitable (paying ourselves small salaries, benefits coverage, and expenses paid for and still have some money left over), and 4 years in. its hard to determine whether to punch it and try to break through to real revenue numbers or to call it and go on to the next idea, which i already have going. It does feel like we're getting closer and i do want to get my team over the finish line but man it is getting rough doing this.

posted on Saturday, October 22, 2011 at 1:14 PM by Ryan


I think this post conflates the term "profitable" with "maximizing revenue", which are not the same thing. Profitability simply means that revenue minus expenses is a positive number, nothing more. It says nothing about the resultant lifestyle, nor whether the money invested in the venture could earn more elsewhere. 
 
I think you're concerned that the term "Ramen profitable" is a little too positive. To me it doesn't sound attractive at all as a lifestyle, which is exactly what Paul Graham intended when he coined the phrase. It's good to be profitable (i.e., not losing money), but the fact that you're eating Ramen implies that you still need to take the next step. Really, there's nothing wrong with the term.

posted on Tuesday, October 25, 2011 at 9:48 AM by Impatient


Dharmesh, 
 
 
 
I appreciate your business insight, but I have a criticism toward your grammar. Please stop mixing pronouns within an article. If you feel it's politically important to avoid masculine pronouns (though the vast body of literature for the last thousand years follow the convention), then please just stick to "she" and "her" throughout a single post. Every single time you bounce back and forth, my brain immediately wonders if you've started to refer to a yet another individual, as opposed to the continued "generic he/she" you mentioned in a previous sentence. 
 
 
 
It's annoying and confusing. It makes me want to just navigate away as I read through your posts. 
 
 
 
Regards.

posted on Thursday, October 27, 2011 at 10:19 AM by Jaycen Rigger


Thanks for sharing this information. Very interesting…

posted on Friday, October 28, 2011 at 8:02 AM by Ankan


I think you have brought up a very valid point. I agree with you 100% that it should be called Ramen Sustainable. If the founders are not paying themselves at least close to a market rate, than the business is not truly profitable.  
 
In the short run i think this is fine if they are just getting by, but this shouldn't be confused with a profitable business. If an investor looks at that business and sees that they are not paying themselves or are not paying themselves a market value, the investors wont consider that a profitable business.  
 
There should be a limit to the amount of time that is spent in the Ramen Sustainable mode before the entrepreneurs move on to other things. There is not a problem to starting out like this but it is not a viable long term option.

posted on Friday, October 28, 2011 at 11:03 AM by Don Tarinelli


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posted on Friday, November 04, 2011 at 8:20 AM by Ankan


Yup; you're (hub)spot on with drawing a distinction between sustainability and profitability, though I'd characterize it more as an economic perspective. Most accountants couldn't care less about opportunity cost as long as the balance sheet is, um, balanced. 
 
When are you better off shutting down? Maybe one VC's fair market value calculator suggests you'll make a bigger impact on GDP elsewhere. But the yardstick for "bigger things" is actually a blank tape-measure which only you - the founder - can define.  
 
As long as you're 1) happy in your founder role, 2) bringing in enough revenue to get your bills paid and 3) not doing a shitty job for your customers, you're in a good place with a runway as long as YOU want it to be. Don't even consider killing the baby until one of those three conditions no longer applies. Look at Colin Angle and the iRobot story; an infinite runway which delivered the founders to ramen paradise.

posted on Tuesday, November 08, 2011 at 4:23 PM by j. alain ferry


Yes sir i believe on the facts which you have written as now its more upon the survival as there is always oppertunity const present there.

posted on Tuesday, December 06, 2011 at 4:19 PM by kaustubh


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