So most entrepreneurs i have met almost always talk about how they need capital in order to startup, which is understandable given that very few have the resources to go through the traditional “bootstrapping” that we all so love to talk about. Those of us that do hack our way to an MVP quickly arrive at this place where we are forced to decide whether to chase the innovation behind our moonshot ideas, or monetise as soon as we generate the least amount of value that a customer is willing to pay for. What makes it even worse is that we live and operate in an ecosystem that believes that a startup must make money from day one and that the title founder’ equates to “I’m making loads of cash.” I think its important as a founder to know what your own definition of success is, and disregard all the other tags associated with your apparent success ( or lack of it there-of.)
Looking back at the last 4 years of building a moon-shot type startup, I realise now that there was an easier way to push forward in innovation without getting sidetracked by what now seems imperatively important: Raising capital- getting the resources we need to continue developing. A middle ground of sorts, a state of progression where the worst case scenario is surviving and not dying. Paul Graham called it attaining Ramen Profitability.
I know it sounds like some state of Nirvana or ascension, where one attains “knowledge and mastery of the self” or some other higher realm state of existence, it is not. It really is the first thing that any and every first-time bootstrapping entrepreneur should strive to achieve. It’s the buzzword that should come before “net-revenue-positive” in the Entrepreneurs’ dictionary.
“Ramen profitable” means a startup makes just enough to pay the founders’ living expenses. It’s not rapid prototyping for business models (though it can be), but more a way of hacking the investment process.”
– Paul Graham
Ramen profitability is a way to simply buy you time and give you almost infinite runway as a startup founder. Something that EVERY startup I know out there can do with, especially without the investor pressure to sell or make absurd amounts of money.
What does this really mean, though?
The “Ramen” in Ramen Profitability refers to instant ramen, which constitutes the shoe-string-budget funded diet that bootstrapping founders and entrepreneurs allegedly survive on. We know them as instant noodles or “Maggies.”Ramen profitability simply means that the startup is making enough money to allow the founders to continue working on their killer-world changing idea…..this does away with some of the “startup-Killers” that contribute to that startup 90% death rate, you know – burnout, frustration, subpar MVP etc.Some of the really cool benefits of Ramen profitability are as follows:
Investors….look at me now!
To start with, you are more attractive to investors. If you are already profitable, (no matter how small the scale) it empirically shows that:
- You at the very least can get someone to pay you
- You are serious about building products that customers want
- You are disciplined enough to keep your expenses low. ( No red Ferarri’s soon after raising your Seed round)
Its important to have that sustainability built right in, before you hit net-revenue-positive or get you product out to the market. Knowing that you will be able to work on it, iterate and pivot and still be able to survive gives you the emboldening confidence that makes entrepreneurs look like a bunch of world-changing visionaries.
Raising Capital…on my own terms
Startups always get to that raise capital or die stage, where the life of the venture now depends on investors closing the round as quickly as possible, It is unfortunate that some investors deliberately delay closing your round because they know that the more desperate you become, the more pliable you will be with the investment terms. ( Sucks for sure, but it happens) Attaining Ramen profitability gives you back that control, you have enough time to build the product and then raise capital at a pace that works for you! Its really important because raising capital is actually a huge undertaking, it is a huge distraction and being able to plan when to undertake it and at what pace will help your small startup team balance out product dev and business dev.
I have always struggled with calling myself a CEO or (insert your cool title here) during the first few months of a startup because it all feels rather theoretical. Yes, it is its own legal entity, but sort of feels like a huge lie when you call it a company and call yourself a CEO or MD. It only starts to feel real when there is an actual product and some real users ( not friends and family) and more importantly when it starts taking care of my personal expenses! So getting to Ramen Profitability helps make it feel real, it keeps you in the game when everything about your startup is still semi-conceptual and held together by duct tape.
Beta testing the Business Model
To clarify, the revenue that helps attain Ramen Profitability isn’t always from the selling of the product being built (although it can be.) In the event that it is, it helps you get a better understanding of how best to price and bill for your value. When possible, founders should beta test their revenue model as the product goes into public beta. The business model should have an iterative nature in the same way that the product evolves through iterations.
Ramen profitability in itself can become a distracting obsession. A ramen profitable company doesn’t have to be making money the way it ultimately will, it just has to be making money…and that is the dangerous part.
In building our moonshot startup, my co-founder and I realised that we had to generate some revenue to sustain ourselves. So we took on consultancy work, It started off just as a means of sustaining ourselves as we innovated, we however found ourselves spending more and more time on client work ( and less on our really cool product,) Soliciting more consultancy clients and not beta testing clients for our startup. Its very easy for a moonshot founder to get distracted by immediate revenue and gain, at the cost of the startup. It requires real focus, dedication and a reminder of why you started working on the startup in the first place.
In retrospect, attaining Ramen Profitability early on would have given us the confidence to shoot for the moon and not doubt our ability to do so. Idealists might prefer that founders focus on the product and worry about what they will eat and where they will live in their own time, forgetting that starting up is a 24/7 affair. If those basic needs aren’t taken care of, founders will direct all their focus on survival at the cost of the startup.