Should a startup be Ramen Profitable?

An interesting question was popped by Mayank in context of PG’s essay – Ramen Profitable
  • How does/should one take call between growing without being profitable or being profitable and then growing (Ramen Profitable)?

At the minimum once every 2-3 months this question pops in the head of  a startup founder. Should we invest in growth or try to become/stay profitable? If one thinks long-term: investing in growth seems to be the call.  From short-term perspective becoming profitable seems important.  What is the right answer?

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  • Every startup’s journey is made up of many “startup phases”
  • Each “startup phase” is on an average 18-24 months long
    • Phase duration could be different for different startups
    • Different phases for the same startup could be of different duration
    • Typically initial phases are of smaller durations (9-12 months) and the phase duration grows longer with each phase and finally settles at 18-24 months

All phases will typically have 3 different parts to it and i’ve detailed them below:

  • Part 1 (6-8 months)
    • You have certain amount of cash, certain goals  & growth targets that you want to achieve
    • The approach should be to invest in growth & towards achieving the planned goals
    • This is the non-profitable time that will include investing in
      • Development of the next (or first) version of the product
      • Team building
      • Building additional capacity
      • More office space (as required)
      • Customer acquisition efforts
      • New branches / New sales channels / Trying new revenue streams (not applicable for startups in the first phase )
      • And other similar activities
    • The startup will use 40-50% of the expense budget for this phase during Part 1
  • Part 2 (6-8 months)
    • Focus on reducing the gap between monthly expenses and monthly revenues and move towards cash-flow positive
    • No more major investments and laser sharp focus on increasing revenues while keeping costs the same or lower
  • Part 3 (6-8 months)
    • Somewhere in the beginning of Part 3 you should hit cash-flow positive state and become – Ramen Profitable – where your revenues are just above your expenses
    • Post that you need to continue to ensure that the gap between the two increases steadily and as a result start building some cash reserves
    • Couple of months after you hit cash-flow positive (for this phase) you can start considering fund raising options
    • To have high probability of raising funds you need both:
      • Significant growth in this phase
      • Cash-flow positive business operations
    • The above two are positives signs for the investor
      • It shows that you are capable of achieving growth as well as capable of managing your cash flow / profitability
      • Also it puts you in a position where you can continue to exist & grow organically without an dependency on any new investors
    • And every investor wants to invest in a team that can succeed without them
    • Once you raise funds or build adequate cash reserves from internal accruals you can start the next phase and repeat the same cycle

Life cycle of a “startup phase”

  • Part 1:
    • Start the phase with certain cash reserves, growth targets & goals
    • Invest in growth
  • Part 2:
    • Focus on building  revenues and reduce the burn rate
    • Start achieving the growth targets
  • Part 3:
    • Become – Ramen profitable / Cash flow positive.
    • Build cash reserves / Raise capital
    • Move to next phase & repeat the cycle

Do we need physical startup incubators?

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Abheek raised this question a few days ago about “the viability of a business like common office building esp for startup companies. Something similar to a physical incubator”.  I thought it may be a good idea to share my thoughts via a post and also find out what the community thinks about this topic.  Please do share your views in comments.

From a property owner’s perspective

  • Startups are always looking to pay as less as possible
  • Startups need very less space in the initial months / years and also use less space per person
  • Startups are risky in the sense that continuity of payments is not ensured
  • Startups may not be in a position to commit to long term leases
  • Hence overall renting space to SMEs / Big companies / MNCs etc is always preferred by property owners
  • Only owners who could be open to this are
    • Folks who are not able to get other tenants
    • Folks who have special soft corner for startups
    • Educational institutes who are subsidizing it
    • Other businesses around startups where giving space is just a small part of overall business
  • Net-Net this explains lack of “dedicated buildings / spaces” for startups
  • There are some spaces which claim to be startup friendly & all; but end of the day ask for too much money
From a startup’s point of view
  • I am personally not convinced that a startup needs to work out of a proper office type space
  • Startups should work out of non-office places like : apartments, garages, basements, left over spaces etc, for a few reasons
    • It costs less
    • You can create your own interiors and your own culture instead of fitting into a office environment where you sit in 4 seats out of the total 10-20 around you
    • Setting up your space gives you a lot more homely / personal feeling
    • Being in a different type of environment also makes it more creative and off-beat
    • This environment attracts the right kind of employees and rejects the  wrong kind who want to work in a normal environment
  • An ideal startup work space is very creative / disorganized / informal and comes at rates that are suited for startups
  • Working & living out of the same apartment saves you the time & money  that would be spent otherwise on office rent & commuting
  • Working in someone else office can make founders feel like employees and put pressure on them to dress in a particular manner and stuff like that – where as they should work in their undies if that helps them write better code

Conclusion

Process of building a startup is very creative, highly immersive,  and totally unique for every startup and this process is best executed in a personal / small / off-beat setting – a setting of your choice, a place that makes you feel comfortable.