According to entrepreneur and venture capitalist Paul Graham, “ramen profitable means a start-up makes just enough to pay the founders’ living expenses”. In his theory, the “traditional” profitability stands for the big investment finally paying off. The main importance of ramen profitability on the other hand is that it buys founders time to keep scaling up.
Graham uses “ramen”, referring to instant noodles as one of the cheapest foods. In a figurative sense, if the founders earn enough to live by (even if by eating ramen), they can take the next steps towards scalability. Reaching the ramen profitable phase means less pressure on making ends meet. Instead, the start-up can continue seeking funding deals that might fly them to the next stage of growth.
From the investors’ point of view, ramen profitability demonstrates that a start-up business:
- has paying customers,
- offers what the market needs,
- is disciplined with its expenses,
- and focuses on enhancing the business instead of raising money.
Thus, if a start-up has gotten as far as this phase, it is more likely to succeed.
Read more about the concept of ramen profitability by Paul Graham here.