OnStartups

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

Posted by Dharmesh Shah on October 21, 2011 22 Comments

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?