business

How to know if a company is profitable

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 how to know if a company is profitable that it buys you time.

In the past, a startup would usually become profitable only after raising and spending quite a lot of money. This kind of profitability means the startup has succeeded. 3000 a month, because the only employees are a couple 25 year old founders who can live on practically nothing. 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.

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. 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. 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.

Why don’t more people do it? Plenty of 25 year olds save nothing anyway. 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. 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. You’re lucky if your productivity is a third of what it was before. And it can last for months. 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. I got hardly any real work done.