Profitability. Burn rate. Runway. All these terms get floated around when building a company. Some may think there are two options for a company: either lose as little as possible or make as much as possible. But, like many things in life, there is more complexity to the issue.
There are companies like WeWork who lost nearly $2 billion of cash between 2018 and 2019. But there are others like Juul who have increased revenue from about $200 million to nearly $1 billion in just one year. They also attained about $12 million in profit during that run.
For any startup, there is a balance between profitability and growth. This doesn’t mean, though, that the only two options are burning billions or making a few million. A third option is making just enough profit to cover the founder’s expenses. In doing so, your company sustainable. Many call this ramen profitability.
Ramen Profitability Defined
Ramen profitability is a term that was popularized by venture capitalist and serial entrepreneur Paul Graham and since he is the man responsible for bringing this term into the lexicon of the business world, he is undoubtedly best equipped to define it.
In his words, ramen profitability “means a startup makes just enough to pay the founders’ living expenses.” This is a different form of profitability than startups have typically pursued. For entrepreneurs, profitability typically means a big bet is paying off in big ways. The main importance of ramen profitability is that you make just enough and it buys you time.
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Ramen Profitable Startups vs Typical Startups
During the early days of a startup, striving to achieve ramen profitability is an excellent way to ensure that a company will survive without raising a lot of capital. In Nebraska, it can be difficult to find venture capital even with a growing network of angel investors. Often, when operating in Lincoln or Omaha, founders struggle to find meaningful investment at early stages like they in larger markets on the coast. A company that has attained enough profit to survive without growth capital can assure it will stick around long enough to find the right investors.
Traditionally, startups have sought out investors in an effort to raise capital that is then spent on building the company. This approach might mean that a business does not see profits for many, many years to come but, when profitability is reached, millions of dollars may be generated. In and around Nebraska, investors are more attracted to stability, profitability, and control. Because of this, ramen profitability is a great approach in the early days of new ventures.
With ramen profitability, a startup can achieve profitability much earlier since investment debts aren’t draining the company. With this approach, the goals are simply to eschew raising capital while focusing on achieving a high enough level of profitability to at least pay for the salary of any founders. Once that benchmark has been reached, the company is profitable.
Ramen Profitability Is an Excellent Indicator of Viability
For startups looking to delay raising capital, the time spent working with a goal of ramen profitability in mind can bring about a few benefits.
One very big advantage is the fact that reaching this goal perfectly indicates the viability of a startup. That’s because, once profitability is achieved, three things can be inferred:
- People are happy to pay for the product, which means that the market exists;
- The founders solved a pain point in the market;
- The startup’s founders were able to control spending and successfully manage cash flow to achieve profitability.
All of these indicators are important benchmarks to achieve when the time does come to start talking with investors.
Advantages Inherent to Ramen Profitability
Choosing to govern a startup with the goal of ramen profitability in mind can have many advantages with some being more obvious than others.
- One key advantage that comes from following this model is the fact that, when founders do need to approach investors, they won’t be desperate for cash and can negotiate better terms.
- A startup’s profitability will also work to the advantage of its founders when approaching investors because profit, no matter how small, will prove the viability of the business.
- Finally, because ramen profitability allows founders to delay the process of raising capital, they are better able to focus their time on the business instead of dealing with endless meetings and negotiations with investors.
Ramen Profitability Is Not a One-Size Fits All Approach
While ramen profitability certainly has its advantages, it isn’t the perfect fit for all entrepreneurs. That’s because, for some startups, such a large infusion of cash is needed right from the beginning that raising capital is virtually unavoidable. It really depends on your end goal. If you’re more concerned with blitz scaling and are okay with burning through money quickly, then ramen profitability isn’t for you. On the contrary, if you’re more interested in long-term growth and becoming a profitable company, ramen profitability is the route for you and your business to take.
Ramen Profitability is the Solution Your Business Needs
Once all of the advantages and disadvantages inherent to ramen profitably are considered, it’s easy to see why it’s such an attractive option for founder on the Silicon Prairie. In places like Nebraska, capital is difficult to find and often takes a much longer time to secure than it might in larger metro areas. Most investors in the Omaha and Lincoln area are more risk-averse, especially in the early stages of new businesses. Ramen profitability assures founders they can stay afloat while they work to secure funding.
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Disclaimer: This article is intended to help business owners make more informed decisions in regards to the topic; however, please contact an attorney for legal advice and an accountant for tax advice. Populus makes no representation as a legal advisor or tax advisor.