July 2009

Now that the term "ramen profitable" has become widespread, I ought to explain precisely what the idea entails.

Ramen profitable means a startup makes just enough to pay the founders' living expenses.

This is a different form of profitability than startups have traditionally aimed for.

Traditional profitability means a big bet is finally paying off, whereas the main importance of ramen profitability is that it buys you time. [1]

In the past, a startup would usually become profitable only after raising and spending quite a lot of money.

A company making computer hardware might not become profitable for 5 years, during which they spent $50 million.

But when they did they might have revenues of $50 million a year.

This kind of profitability means the startup has succeeded.

Ramen profitability is the other extreme: a startup that becomes profitable after 2 months, even though its revenues are only $3000 a month, because the only employees are a couple 25 year old founders who can live on practically nothing.

Revenues of $3000 a month do not mean the company has succeeded.

But it does share something with the one that's profitable in the traditional way: they don't need to raise money to survive.

Ramen profitability is an unfamiliar idea to most people because it only recently became feasible.

It's still not feasible for a lot of startups; it would not be for most biotech startups, for example; but it is for many software startups because they're now so cheap.

For many, the only real cost is the founders' living expenses.

The main significance of this type of profitability is that you're no longer at the mercy of investors.

If you're still losing money, then eventually you'll either have to raise more or shut down.

Once you're ramen profitable this painful choice goes away.

You can still raise money, but you don't have to do it now.

"Ramen profitable" means a startup makes just enough to pay the founders' living expenses. Traditional profitability means a big bet is finally paying off; ramen profitability's importance is that it buys you time.

A startup used to become profitable only after spending a lot: a hardware company might take 5 years and $50 million, then earn $50 million a year. That means it has succeeded.

Ramen profitability is the other extreme: profitable after 2 months on $3000 a month, because the only employees are a couple of 25 year old founders who live on practically nothing. That isn't success—but they don't need to raise money to survive.

It only recently became feasible—not for biotech, but for many software startups, now so cheap the only real cost is the founders' rent.

The main significance is that you're no longer at the mercy of investors. Once ramen profitable, the painful choice between raising more and shutting down goes away: you can still raise money, but not now.

Ramen profitable means a startup earns just enough to cover the founders' living expenses. Unlike traditional profitability, which signals success, its value is that it buys you time and frees you from depending on investors.

* * *

The most obvious advantage of not needing money is that you can get better terms. If investors know you need money, they'll sometimes take advantage of you.

Some may even deliberately stall, because they know that as you run out of money you'll become increasingly pliable.

But there are also three less obvious advantages of ramen profitability.

One is that it makes you more attractive to investors.

If you're already profitable, on however small a scale, it shows that (a) you can get at least someone to pay you, (b) you're serious about building things people want, and (c) you're disciplined enough to keep expenses low.

This is reassuring to investors, because you've addressed three of their biggest worries.

It's common for them to fund companies that have smart founders and a big market, and yet still fail.

When these companies fail, it's usually because (a) people wouldn't pay for what they made, e.g. because it was too hard to sell to them, or the market wasn't ready yet, (b) the founders solved the wrong problem, instead of paying attention to what users needed, or (c) the company spent too much and burned through their funding before they started to make money.

If you're ramen profitable, you're already avoiding these mistakes.

The most obvious advantage is better terms. If investors know you need money, some take advantage, and some deliberately stall, because as you run out you become pliable.

A less obvious one: profitability makes you more attractive to investors. It shows you can get someone to pay you, that you're serious about building what people want, and that you're disciplined about expenses—their three biggest worries, addressed.

Investors often fund smart founders in a big market who still fail: people wouldn't pay, the founders solved the wrong problem, or they burned through funding too soon. Ramen profitable, you're already avoiding these.

Not needing money gets you better terms, since investors who know you're desperate will take advantage. And being profitable on any scale reassures investors by addressing their three biggest worries.

Another advantage of ramen profitability is that it's good for morale.

A company tends to feel rather theoretical when you first start it.

It's legally a company, but you feel like you're lying when you call it one.

When people start to pay you significant amounts, the company starts to feel real.

And your own living expenses are the milestone you feel most, because at that point the future flips state.

Now survival is the default, instead of dying.

A morale boost on that scale is very valuable in a startup, because the moral weight of running a startup is what makes it hard.

Startups are still very rare.

Why don't more people do it?

The financial risk?

Plenty of 25 year olds save nothing anyway.

The long hours?

Plenty of people work just as long hours in regular jobs.

What keeps people from starting startups is the fear of having so much responsibility.

And this is not an irrational fear: it really is hard to bear.

Anything that takes some of that weight off you will greatly increase your chances of surviving.

A startup that reaches ramen profitability may be more likely to succeed than not.

Which is pretty exciting, considering the bimodal distribution of outcomes in startups: you either fail or make a lot of money.

Another advantage is morale. A company feels theoretical at first—you feel like you're lying when you call it one. When people pay you significant amounts, it feels real. Your own living expenses are the milestone you feel most, because the future flips state: now survival is the default, not dying.

That boost matters because the moral weight of running a startup is what makes it hard. Why don't more people do it? Not financial risk, not the long hours. It's the fear of so much responsibility, and it's not irrational. Anything that lifts some of that weight greatly increases your chances of surviving.

A startup that reaches ramen profitability may be more likely to succeed than not. Which is pretty exciting, considering the bimodal distribution of outcomes in startups: you either fail or make a lot of money.

Ramen profitability makes a startup feel real and flips survival to the default. That morale boost matters because the fear of so much responsibility—not money or hours—is what keeps people from starting startups.

The fourth advantage of ramen profitability is the least obvious but may be the most important.

If you don't need to raise money, you don't have to interrupt working on the company to do it.

Raising money [blocked] is terribly distracting.

You're lucky if your productivity is a third of what it was before.

And it can last for months.

I didn't understand (or rather, remember) precisely why raising money was so distracting till earlier this year.

I'd noticed that startups we funded would usually grind to a halt when they switched to raising money, but I didn't remember exactly why till YC raised money itself.

We had a comparatively easy time of it; the first people I asked said yes; but it took months to work out the details, and during that time I got hardly any real work done.

Why?

Because I thought about it all the time.

At any given time there tends to be one problem that's the most urgent for a startup.

This is what you think about as you fall asleep at night and when you take a shower in the morning.

And when you start raising money, that becomes the problem you think about.

You only take one shower in the morning, and if you're thinking about investors during it, then you're not thinking about the product.

Whereas if you can choose when you raise money, you can pick a time when you're not in the middle of something else, and you can probably also insist that the round close fast. You may even be able to avoid having the round occupy your thoughts, if you don't care whether it closes.

The fourth advantage is the least obvious but maybe the most important: if you don't need to raise money, you don't have to interrupt working to do it. Raising money [blocked] is terribly distracting—productivity drops to a third, and it can last months.

I didn't remember why until YC raised money itself. It took months to work out the details, and I got hardly any real work done—because I thought about it all the time.

At any given time there's one problem most urgent for a startup—what you think about as you fall asleep and in the shower. When you raise money, that becomes the problem. And if you're thinking about investors in the shower, you're not thinking about the product.

Whereas if you can choose when to raise money, you can pick a time you're not in the middle of something and insist the round close fast.

The fourth and maybe most important advantage: if you don't need money, you don't have to interrupt the company to raise it. Fundraising is ruinously distracting because it becomes the one problem you think about.

* * *

Ramen profitable means no more than the definition implies.

It does not, for example, imply that you're "bootstrapping" the startup—that you're never going to take money from investors.

Empirically that doesn't seem to work very well.

Few startups succeed without taking investment.

Maybe as startups get cheaper it will become more common.

On the other hand, the money is there, waiting to be invested.

If startups need it less, they'll be able to get it on better terms, which will make them more inclined to take it.

That will tend to produce an equilibrium. [2]

Another thing ramen profitability doesn't imply is Joe Kraus's idea that you should put your business model in beta when you put your product in beta.

He believes you should get people to pay you from the beginning.

I think that's too constraining.

Facebook didn't, and they've done better than most startups.

Making money right away was not only unnecessary for them, but probably would have been harmful.

I do think Joe's rule could be useful for many startups, though.

When founders seem unfocused, I sometimes suggest they try to get customers to pay them for something, in the hope that this constraint will prod them into action.

The difference between Joe's idea and ramen profitability is that a ramen profitable company doesn't have to be making money the way it ultimately will.

It just has to be making money.

The most famous example is Google, which initially made money by licensing search to sites like Yahoo.

It doesn't mean "bootstrapping"—never taking investment. Empirically that doesn't work well; few startups succeed without it. The money is there waiting, and if startups need it less they'll get better terms and be likelier to take it. That produces an equilibrium.

Nor does it imply Joe Kraus's idea that you should put your business model in beta when you put your product in beta. I think that's too constraining; Facebook didn't, and making money right away would probably have harmed them. Still, when founders seem unfocused, I suggest they get customers to pay for something.

The difference is that a ramen profitable company doesn't have to be making money the way it ultimately will. It just has to be making money. The most famous example is Google, which initially made money by licensing search to sites like Yahoo.

Ramen profitable doesn't mean bootstrapping—few startups succeed without investment. Nor does it mean making money the way you ultimately will, as Joe Kraus argued; it just has to be making money, like Google licensing search early on.

Is there a downside to ramen profitability?

Probably the biggest danger is that it might turn you into a consulting firm.

Startups have to be product companies, in the sense of making a single thing that everyone uses.

The defining quality of startups is that they grow fast, and consulting just can't scale the way a product can. [3] But it's pretty easy to make $3000 a month consulting; in fact, that would be a low rate for contract programming.

So there could be a temptation to slide into consulting, and telling yourselves you're a ramen profitable startup, when in fact you're not a startup at all.

It's ok to do a little consulting-type work at first. Startups usually have to do something weird at first. But remember that ramen profitability is not the destination.

A startup's destination is to grow really big; ramen profitability is a trick for not dying [blocked] en route.

The biggest danger is that it might turn you into a consulting firm. Startups have to be product companies that grow fast, and consulting can't scale the way a product can. But $3000 a month consulting is easy, so there's a temptation to slide into it and call yourself a ramen profitable startup, when you're not a startup at all.

It's ok to do a little consulting at first. But ramen profitability is not the destination. A startup's destination is to grow really big; ramen profitability is a trick for not dying [blocked] en route.

The biggest danger is sliding into consulting, which can't scale the way a product can. Ramen profitability isn't the destination—it's a trick for not dying en route to growing big.

Notes

[1] The "ramen" in "ramen profitable" refers to instant ramen, which is just about the cheapest food available.

Please do not take the term literally.

Living on instant ramen would be very unhealthy.

Rice and beans are a better source of food.

Start by investing in a rice cooker, if you don't have one.

Rice and Beans for 2n

olive oil or butter
n yellow onions
other fresh vegetables; experiment
3n cloves garlic
n 12-oz cans white, kidney, or black beans
n cubes Knorr beef or vegetable bouillon
n teaspoons freshly ground black pepper
3n teaspoons ground cumin
n cups dry rice, preferably brown

Put rice in rice cooker.

Add water as specified on rice package. (Default: 2 cups water per cup of rice.)

Turn on rice cooker and forget about it.

Chop onions and other vegetables and fry in oil, over fairly low heat, till onions are glassy.

Put in chopped garlic, pepper, cumin, and a little more fat, and stir.

Keep heat low.

Cook another 2 or 3 minutes, then add beans (don't drain the beans), and stir.

Throw in the bouillon cube(s), cover, and cook on lowish heat for at least 10 minutes more.

Stir vigilantly to avoid sticking.

If you want to save money, buy beans in giant cans from discount stores.

Spices are also much cheaper when bought in bulk.

If there's an Indian grocery store near you, they'll have big bags of cumin for the same price as the little jars in supermarkets.

The "ramen" refers to instant ramen, the cheapest food available. But don't take it literally: living on it would be unhealthy. Rice and beans are better—start with a rice cooker.

"Ramen" refers to instant ramen, the cheapest food around—but don't take it literally, since living on it would be unhealthy. Rice and beans are better; start with a rice cooker.

[2] There's a good chance that a shift in power from investors to founders would actually increase the size of the venture business. I think investors currently err too far on the side of being harsh to founders. If they were forced to stop, the whole venture business would work better, and you might see something like the increase in trade you always see when restrictive laws are removed.

Investors are one of the biggest sources of pain for founders; if they stopped causing so much pain, it would be better to be a founder; and if it were better to be a founder, more people would do it.

[3] It's conceivable that a startup could grow big by transforming consulting into a form that would scale. But if they did that they'd really be a product company.

Thanks to Jessica Livingston for reading drafts of this.

A shift in power from investors to founders would probably grow the venture business—they err too far toward harshness, and if forced to stop you'd see the increase in trade that follows removing restrictive laws. Investors are a huge source of pain for founders; if they stopped, more people would be founders.

A startup could grow big by transforming consulting into a form that scales—but then they'd really be a product company.

A shift in power from investors to founders would likely grow the venture business, since investors err too far toward harshness. And a startup that scaled consulting would really just be a product company.