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