Ramen Profitability – The First Respite of a Startup
This is a guest post by Leana Thorne. Leana is an influential online presence in the world of business strategy and finance. She is currently writing on behalf of Corporate USB.
Ramen profitability is a relatively new term, used to describe the threshold that marks a startup’s ability to provide its founder with the most basic means of supporting him or herself. In other words, it marks the point at which the startup starts earning enough to cover the costs of operation and provide a salary for its one employee (the founder).
When Can You Hope to Achieve It
Even though some studies claim that on average, a business will need at least six months to effectively nullify the initial burn rate (the required investment for the startup, i.e. the deficit that arises from the costs of running a business being greater than the profit), it is impossible to generalize on this subject. This is mostly due to the fact that different businesses have different investment requirements and different returns. If, for instance, you are starting a biochemical company, ramen profitability is something that will probably never be of interest to you (more on that later), but if you are starting a software development business, you might be able to achieve this type of income early on.
The development business doesn’t require a large investment, as you don’t need the office or infrastructure early on, and maintenance fees are minimal, so you might hit the sweet spot early on, but this will, again, be different on case to case basis.
Advantages and Disadvantages of Ramen Profitability
This kind of profit to investment ratio is not something that every company will strive to achieve. Numerous large companies never intended to end up in this limbo of sorts, but instead, entered the area of profitability with a bang. That is to say, as soon as they became profitable, they became really profitable. Amazon, for instance adopted a business plan that projected nothing but losses for six years, but once they started earning, the wait turned out to be a great choice. Some companies, with large initial investments (which applies to the biochemical companies, mentioned earlier) usually entirely skip this step, but some businesses can find their salvation in ramen profitability.
So what exactly are the benefits for those companies? Well, first of all, they get the relief and morale boost that comes with the fact that their business is actually making some money. This is by no means a trivial issue, as it allows the founder to start introducing improvements instead of just trying to stay afloat.
However, the most important benefit is that the investors are pacified and that they don’t have as much control over the founder as they did before. A lot of immoral investors will use the fact that a startup is taking loses and that is in desperate need of funding to negotiate very unfavorable deals and, basically, extort the founder. With the investors mollified, the founder doesn’t have to worry about raising money (which is a terrible distraction from the startup itself) and can get better deals.
Some founders are perfectly happy to prolong this state for a while, perhaps leaving more money as business profits, so as to further please the investors, some will use the decrease in tension to expand the business, while others will be perfectly happy to continue operating that way for the foreseeable future. Either way, once you cross that limit, the chances of your business going down are significantly reduced, and you can breathe more freely.