|  
  
|  **Want to start a startup?** Get funded by Y Combinator.  
  
---  
  
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.   
  
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.  
  
* * *  
  
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.  
  
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.  
  
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 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.  
  
* * *  
  
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.   
  
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.  
  
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.  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 en route.  
  
  
  
  
  
**