bootstrapping!

In a time when capital has become much more expensive, we are witnessing a paradigm shift from growth at all costs, to balancing out growth and profitability.

This might seem trivial, but it's what's going right now with most tech companies that, for the last two decades, have not been profitable (with a few exceptions) to moving toward profitability as a key target for long-term success.

In short, we live in a time of bootstrapping! Or where the customer becomes the key investor in the business by continuously buying into a company's product, thus enabling the company to sustain itself in the long run.

The first step to bootstrapping is the so-called "ramen profitability."

Serial entrepreneur and venture capitalist Paul Graham popularized "Ramen Profitability." As he pointed out, "Ramen profitable means a startup makes just enough to pay the founders' living expenses."

Let's dive into this concept to understand why it matters.

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What is Ramen Profitability?

Entrepreneur and venture capitalist Paul Graham popularized the term "Ramen Profitability," defining it as:

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 is that it buys you time.

Paul Graham uses the word "ramen" in "ramen profitable," referring to instant ramen, one of the cheapest foods available. Thus, a first step toward startup scalability.

As Paul Graham points out, Ramen Profitability is a different concept compared to traditional startup profitability indeed, where startup profitability might indicate the viability of a startup business model.

Ramen's profitability suggests the fact that the startup has finally crossed that wall that enables it to be called a real company.

That's because it can finally pay off the founders' living expenses, thus making it become at least a real business.

That also buys time for the startup to experiment with growth, product-market fit, and venture capital funding to finance further tweaks to its business model.

Ramen Profitability as a survival mechanism

A startup that becomes profitable after 2 months, even though its revenues are only $3000 a month, because the only employees are a couple 25 year old founders who can live on practically nothing. Revenues of $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.

Paul Graham points out that ramen profitability makes it possible for a startup to survive.

That doesn't guarantee success, but it does help the startup buy precious time to keep experimenting.

Why does Ramen Profitability matter?

Paul Graham highlights a few key points:

You can get at least someone to pay you,
You're serious about building things people want,
You're disciplined enough to keep expenses low.
You can focus on further growing the startup rather than focusing on raising money, which is distracting.

The bimodal way for startups

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.

Paul Graham makes a good point here. In a more and more competitive business environment, building up a successful, scalable startup becomes a winner-take-all game.

Whereas for many failed startups, a few make a lot of money. And if you're on the way to ramen profitability that's the crucial first step toward building a successful company.

Indeed, ramen profitability removes the dependency on investors' money. Thus the paradox is that it makes it easier for founders' to look for investments, by releasing the pressure.

That's because as Paul Graham points out, looking for investors' money is itself a job that takes away the focus from building the startup.

Bootstrapping vs. Ramen Profitability

The general concept of Bootstrapping connects to "a self-starting process that is supposed to proceed without external input."

In business, Bootstrapping means financing the company's growth

from the available cash flows produced by a viable business model. Bootstrapping requires the mastery of the key customers driving growth.

It does not, for example, imply that you're "bootstrapping" the startup—that you're never going to take money from investors.

Ramen profitability doesn't mean that a startup isn't willing to take investors' money, so to be in bootstrapping mode forever.

Instead, it means it has enough means to be at least sustainable.

The next stage is scalability. To go toward scalability, a startup must avoid a trap that is common to many.

The trap of becoming a consulting company

Is there a downside to ramen profitability? Probably the biggest danger is that it might turn you into a consulting firm. Startups have to be product companies, in the sense of making a single thing that everyone uses.

A startup becomes truly valuable when it builds a scalable product, service, or platform that can tap into network effects.

That is also why startups like Airbnb and tech companies like Amazon, Google, and Apple are valued many times over their revenues.

They have been able to build successful platforms able to match the interests of many stakeholders.

That enables a startup to become scalable over time. The level of scalability is critical to the long-term value of that startup over time.

You can read the whole essay here.

Airbnb is the classic example of ramen profitability for startups

The most interesting example of ramen profitability was when Brian Chesky, part of the Y Combinator accelerator, back in 2008, was followed by venture capitalist Paul Graham.

Paul Graham invited Brian Chesky to reach, as a first target, ramen profitability.

As Paul Graham pointed out in a piece “The Airbnbs:”

Ramen profitability is not, obviously, the end goal of any startup, but it’s the most important threshold on the way, because this is the point where you’re airborne. This is the point where you no longer need investors’ permission to continue existing. For the Airbnbs, ramen profitability was $4000 a month: $3500 for rent, and $500 for food. They taped this goal to the mirror in the bathroom of their apartment.

This made Airbnb's co-founders focus on the hottest (most important) subset of the market for them, New York.

As they narrowed down their market, suddenly numbers started to grow quickly, and in a few weeks, they reached ramen profitability.

Source: Paul Graham Twitter

This was the initial journey of Airbnb.

Recap: In This Issue!

Definition: Ramen Profitability, coined by Paul Graham, refers to a startup's ability to generate enough revenue to cover the founders' living expenses. It is a different form of profitability compared to traditional models, providing startups with time to experiment and explore growth opportunities.
Survival Mechanism: Achieving Ramen Profitability allows startups to survive without the need for external funding. It may not guarantee success, but it provides a crucial foundation for further growth and experimentation.
Benefits of Ramen Profitability: Ramen Profitability offers several benefits, including the ability to validate market demand, focus on building products that customers want, and keep expenses low. It also frees founders from the constant need to raise funds, allowing them to concentrate on the startup's development.
Bimodal Outcomes: Startups typically experience bimodal outcomes, either failing or achieving significant success. Ramen Profitability increases the likelihood of a startup's success as it represents a critical step towards building a sustainable and scalable company.
Avoiding the Consulting Trap: While Ramen Profitability is essential, startups must avoid becoming consulting firms. True value lies in building scalable products or platforms that can attract a large user base and tap into network effects.
Path to Scalability: Achieving Ramen Profitability is an important milestone, but it should be a stepping stone towards scalability. Startups must focus on creating products or services that offer long-term value and attract a broader audience.
Airbnb's Ramen Profitability Journey: Airbnb's co-founders famously pursued Ramen Profitability as their initial goal. They focused on the New York market, leading to rapid growth and the ability to sustain their startup without external funding.