Being 'Ramen Profitable'

Another “hey there is a term for it” moment today!

Years ago when I was running a business of my own, my intention was never to be wildly successful. All I wanted to do was to make my ends meet, learn a lot of stuff, do a lot of work on stuff that really interested me, and work in a way that made sense. After giving this some time, and when I am somewhat self-sustaining, the next stage was to organically scale up with a set of productized services (as an Opensource focused company normally does) which will fund the next stage which was to come out with actual products which really rakes in the moolah. Being an overnight sensation was neither my style, nor did I consider it practical.

The common response I got from anybody who wanted to give advice on how to run my company (read everybody) was on the line of:

You working alone? Why? Get some staff, grab a few high profile jobs, approach some VC and then ramp up. That way, you don’t have to run around doing collections and focus on your work.

When I put forward my intentions, there were generally two reactions - either one of confusion (what the heck is this guy trying to do?) or smirking condescension(this guy is not serious about business).

Over years, I have met and read about several individuals who think about running a business the same way. Unless you have a brilliant web/mobile based idea which has network-effect friendly features, it really doesn’t make sense to me why you would effectively hand over part ownership of your company to someone just because you are impatient and want to get big/rich quick.

Turns out this thought process has been given a name - ramen profitable, by the startup guru Paul Graham (article). He defines it thusly:

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.

There are several advantages to this business model.

1. You are no longer at the mercy of investors, and have a partner who has a different term view of the investment. You invest with your time, effort and money for the long term, they invest with their time and money for their window of investment (which is generally more short term).

2. You make yourself more attractive to investors by showing seriousness and fiscal discipline. You also show a working model by having paying customers - it is no longer a theory that you need to pitch to investors.

3. It is great for the morale for both the founders and the staff. Work is lesser of a gamble if you are being paid by company income rather than by the investors money.

This is not a permanent business model as Paul points out repeatedly.

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.

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.

I believe that if you are starting off on your own, you don’t necessarily have to keep the flipkarts and facebooks as your idols. This is much more sane advice if you are in for the long haul.