ramen-profitability

What Is Ramen Profitability And Why It Matters

Serial entrepreneur and venture capitalist Paul Graham popularized the term “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 see what it means and why it matters.

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 ramens, 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

bootstrapping-business
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 growth of the company 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. 

airbnb-ramen-profitability

Source: Paul Graham Twitter

This was the initial journey of Airbnb. 

Read Next: Airbnb Business Model

Related Visual Stories To Airbnb

Airbnb Competitors

airbnb-competitors
The Airbnb story began in 2008 when two friends shared their accommodation with three travelers looking for a place to stay. Just over a decade later, it is estimated that the company now accounts for over 20% of the vacation rental industry. As a travel platform, Airbnb competes with other brands like Booking.com, VRBO, FlipKey, and given its massive amount of traffic from Google. Also, platforms like Google Travel can be considered potential competitors able to cannibalize part of Airbnb’s market.

Airbnb Business Model Economics

airbnb-statistics
In 2021, Airbnb generated enabled $46.9 Billion in Gross Booking Value, and it generated $6 Billion in service fee revenues. On 2021, there were $300.6 Million Nights and Experiences Booked, ad an average service fee of 12.78%, at an Average Value per Booking, $155.94.

Airbnb Take Rates

how-much-does-airbnb-take
Airbnb’s take rates, also called fees, that the platform charges to hosts range between 15-20%. In Q3 2022, Airbnb’s take rate was around 18.5%, compared to 18.8% in 2021 on almost a hundred million nights booked over the platform. Airbnb’s gross booking value per night was $156.44 in Q3 2022, and the total gross booking value was $15.6 billion.

Storyboarding

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A storyboard is a linear sequence of illustrations used in animation to develop a broader story. A storyboard process is now used also in business to understand and map customers’ experience and enable the growth of the company using that process.

Airbnb Arbitrage

airbnb-arbitrage
Airbnb arbitrage is a business model where the renter of a house or apartment sub-lets the property to Airbnb users. This is a model where the Airbnb arbitrageur can transform a long-term rental, with the main property owner, into a short-term rental, with higher rates and margins.

ADU Market

adu-market
An accessory dwelling unit (ADU) is a term used to describe a secondary house or apartment located on the same plot of land as a larger, primary place of residence. This has become an industry for its own sake, with the potential to become the next trillion-dollar industry.

Samara Business Model

samara
Samara is a manufacturer of prefab accessory dwelling units (ADUs) that can be installed and operational in a matter of hours. It started as an R&D unit of Airbnb in 2016. And it eventually was spun off and run by Airbnb co-founder Joe Gebbia, who now runs it full-time.

Key resources:

Startup case studies: 

Related Innovation Frameworks

Business Engineering

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Business Model Innovation

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Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.

Innovation Theory

innovation-theory
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.

Types of Innovation

types-of-innovation
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).

Continuous Innovation

continuous-innovation
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.

Disruptive Innovation

disruptive-innovation
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.

Business Competition

business-competition
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.

Technological Modeling

technological-modeling
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.

Diffusion of Innovation

diffusion-of-innovation
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.

Frugal Innovation

frugal-innovation
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.

Constructive Disruption

constructive-disruption
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.

Growth Matrix

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In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).

Innovation Funnel

innovation-funnel
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.

Idea Generation

idea-generation

Design Thinking

design-thinking
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.

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