November 6, 2011

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

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].

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?


Shah is the CTO & Founder of HubSpot

in Cambridge, Massachusetts.  You can find this blog post, as well as
additional content on his blog called On

Startups.  You can also follow him on Twitter: @dharmesh.