Summary on Ramen Profitability
It was first used by Paul Graham, founder of Y Combinator, in an article, A Fundraising Survival Guide, in 2008. By the year 2009, it was so widely used that Paul Graham titled one of his articles Ramen Profitable.
It basically means that the venture is profitable, but only enough cover the basic living expenses of the founders.
The phrase is used to reference start-ups that are making enough money for the founders to live on the start-up staple of Ramen noodles.
Its all about living off of minimal expenses. The idea of a company becoming profitable is when the cash starts pouring in but in certain cases especially for tech start-ups the expenses are minimal and the only thing that creates expense is the living cost for the founders. Yeah it does save you from troublesome investors but if your still not gaining profits then eventually you’ll have to raise capital or shut down and reality will flush your company down the drain.
Simply put it’s a stagnation period for a start up where you sit on available capital and work with what you have rather than getting equity or debt. The stage provides a situation where your company isn’t dry and in desperate need for money and you can get better terms. Its hard for a start up to succeed without any form of investment or large capital that your business would require to grow.
It’s awesome for start-ups to get to a point that they’re not reliant on external funding sources to survive. I’d call this stage of a start-up of Ramen Sustainable. This stage gets a start-up infinite runway, and can be a very good thing, because the entrepreneur can then tweak, iterate, pivot to his content. But, that’s also the problem with Ramen Sustainable start-ups. The entrepreneur may keep going longer than would have been warranted, instead of moving on to their next big idea.
On the flip side Ramen profitability is a relatively a new concept to most people and most importantly it is not feasible for a lot of start-ups(mostly works for a tech start-up). Another hiccup is that this might turn a start up into a consulting firm. Start-ups have to be product companies(making a single thing that everyone needs). The defining quality of a start-up is that they grow fast, and doing consulting wont help it to scale the way a product can.
If a start up is in the stage of ramen profitability will be able to sustain itself only for a short period of time unless and until the venture starts to gain some sort of investment only then a start up can achieve growth. Hence being ramen profitable is good for a start up only for a brief period of time.
