The beauty of phrases like "beer money profitable" and "ramen profitable" is that people will understand what you really mean. Even a VC will understand that "beer money profitable" means that you clear $200 above raw expenses without accounting for the cost of your time (ie, it's a hobby that doesn't lose money).<p>The key in any communication is accurately conveying the facts. So use words that will be understood in context by the audience. For example, my own friends would use the same standard as a professional investor to define the term "profitable". They would think I'd lost my marbles if I claimed I was profitable making just $200 a month.<p>But if you're a high school student, and you're talking to your Aunt Nelly, sure you can use the term "profitable" to describe making $200 a month above expenses. In fact, if you were making $200K a month you would have to say "WAAAY more than profitable", lest she assume that "profitable" meant $200 a month.<p>Just be clear so that you're understood, in context.
This is pretty inconsistent with how the phrase "profitable business" has long been used. Maybe the startup world wants to invents its own metric, but to most small businessmen, whether a business is <i>profitable enough</i> for you to live on the profits is a separate question from whether the business is turning a profit in the first place, i.e. whether your endeavor is bringing you more income than it's producing in expenses. A business that's making $1000/mo is profitable, but not necessarily profitable enough to live on.<p>The idea of paying a founder a salary and accounting for that is also pretty atypical; most small businessmen are sole proprietors, and do not pay themselves salaries. You don't "deserve" some specific hourly rate as an owner, as that's the whole difference between owning a company and working for an hourly wage.<p>This doesn't seem very complex in other areas of business. If your business is turning a small profit, but not enough to live on, that's what you say. "Q: How's the restaurant doing? A: It's turning a modest profit now, but not really enough for it to be a living yet."
Profitable does not mean 'making more money than you could otherwise', profitable does not mean 'worthwhile', profitable does not mean 'sustainable without ones founders.'<p>Profitable means making a profit. End of story.<p>This is a petty, semantic issue. if a company is making $50/month in profits, then the issue isn't that they're calling themselves profitable, its that they're only making $50/month.
The point is that a business (at least from this point of view) is an entity in its own right. The founders are a bit like a life-support machine – if you switch them off, does the business die? (Of course, even a profitable business might die if the business can't hire some people to replace the founders.)<p>Because the business is supposed to be an entity in its own right, you have to value the founder's contribution somehow in deciding whether it is profitable. One way might be to consider what the salary would be to hire someone to take it over such that it continues to produce the same revenue. Another way might be to pay the founders their living expenses (ramen-profitable.) But discounting the cost of the founders working on it to zero? As the article says, that is meaningless.<p>It's like the old joke: Q: How can you quickly make a million dollars? A: Invest two million dollars in $TOPICAL_RISKY_ACTIVITY<p>If you hack it together on weekends and with no oversight it is reliably making a $100 more than hosting a month and will do for the foreseeable future, it's profitable (albeit at a small level and not necessarily sustainable).<p>But if you're living off savings and working full time on it, and it's making $1000 dollars a month, its not profitable.
Potential Investor: "I loved your pitch, and I think your business model is great, but in going over your projected financials, I see you're planning on taking a $4,000/mo salary from day one. Don't you think you should have a little more skin in the game?"<p>Entrepreneur: "At my last consulting gig, I was making $8,000/mo before I left to start this company. I haven't been taking any salary for the last two months while I built a prototype, so I would certainly say I've got skin in the game. At the same time, this business is going to sustain a lot more than just one $4,000/mo salary - if you don't think it can, then you shouldn't invest in the first place"
Well, that wasn't what I expected from a post on asmartbear. Trite quibbling over minor semantic distinctions? For an early stage startup, spending even two seconds worrying about the exact definition of "profitable" and whether or not your definition is suitable to someone else, is two seconds one could have spent writing code or doing something productive.<p>Pretty much a useless article, as far as I can tell.
The article ignores the sentiment that applies to me and probably others on this site. I would rather earn the $1k working on my own products than $10k working for someone else.<p>There is also the potential that the $1k will grow over time.<p>I therefore don't think it's reasonable to value my time at $10k for the purpose calculating my profits.<p>[The figures will obviously vary on a person by person basis.]<p>More broadly, I view this from the E-Myth [1] perspective:<p>If you work within the business as a job, you're selling yourself short if your business is generating $1k a month when you could be earning $10k working for someone else. The money you have left on the table has a real opportunity cost to you as an individual and should probably be valued closer to the shortfall you are taking of $9k.<p>However, if you view your business as a system - something that has money going out (product, marketing, people you pay) and money coming in (sales) then that money is a genuine excess that the system is kicking out and into the entrepreneurs pocket and is most certainly profit from his endeavor, whether $1 or $1MM.<p>[1] <a href="http://www.e-myth.com/" rel="nofollow">http://www.e-myth.com/</a>
This is definitely not a useless article. If you've ever read an article or blog post where someone is talking about how they built their business and said something about being profitable at some x point in time, then they proceed to NOT describe what they exactly mean, then I just end up disregarding the whole thing because I can't take what they say at face value. I'm glad someone spoke up about this because it should (hopefully) mean higher quality articles in the future.
Great post. If someone is trying to sell you an idea or technique and they use their own profitability to justify this technique, then the definition of "profitable" is very relevant.<p>In my mind, a business that excludes the time spent by its founder from its expenses is not honestly assessing its profitability.
The article makes the point that a business should only be considered profitable when it is sustainably profitable - e.g. when it can pay its workers for their time.<p>Given the debate that this idea appears to be generating perhaps another way of looking his idea is to say that the business has no value as a business until it is sustainably profitable (even though it may control assets that may be valuable when liquidated such as a web domain or even talent which another company may wish to acquire) - i.e. until it is sustainably profitable a business has no value as an ongoing enterprise and can only be sold for the value of its assets.
I'm not going to say the author stole my post from yesterday, but it sure is eerily similar... What a coincidence!<p><a href="http://jerzygangi.com/2012/06/17/youre-making-money-but-are-you-making-a-profit/" rel="nofollow">http://jerzygangi.com/2012/06/17/youre-making-money-but-are-...</a><p><a href="http://news.ycombinator.com/item?id=4126955" rel="nofollow">http://news.ycombinator.com/item?id=4126955</a>
Having worked in finance 16 years, I do not understand this fuss about semantics - "ramen", "beer", "sushi" ... profitable.<p>For starters, for any business, let's look at the numbers:<p>- market size, market share, market dynamics<p>- gross & net revenue - abs $ and % growth<p>- gross margin, gross profit, operating income, net income - abs $, % of revenue & % growth<p>- Balance Sheet, Income Statement and Cash Flow<p>Then we can talk semantics.<p>Edit: formatting
Love this: "So now that I’ve perhaps unfairly ridiculed you, let’s just recognize what’s really going on, because it’s wonderful and amazing and fantastic and exciting"<p>Most posts like this just bitch and moan, but he actually provides valuable advice.
Let's try more succinctly. "Stop claiming your lemonade stand is profitable if it only pays for itself if you don't count the person selling the lemonade."<p>That's fair. But the Internet doesn't work that way. If you develop something once, you don't need to keep standing there and keep developing it. The whole reason the article is wrong can be boiled down to this. For more nuanced response you can see my other comments.<p>Basically, it would be like saying, "A restaurant that makes 50,000 per month in profit isn't profitable if the person who made it is Bill Gates."<p>Since, "automatically" Bill Gate's time is worth a lot more doing just about anything else other than launching a restaurant. But come on. When it comes time to buy the restaurant and see how much it makes in profit so you can see how much you will pay for it - do you really think you'll reconsider the whole thing as unprofitable just because Bill Gates spent way more of his time on it than can possibly be valued at as low as that?<p>Get real. From an investment standpoint, nobody cares about the founder's development time. And guess what the article is about? Investment standpoint.
Breakeven is the term people really should be using. It has been around for a very long time, and it is very clear about what it means.<p>The thing is, people want to use the term "profitable" because they want to spin where their business is at.<p>Operationally break-even would mean your income exceeds your hosting expenses.<p>Breakeven sans salaries, would imply that you're ramen profitable but nobody is getting paid.<p>And from there you could say "we're profitable enough to hire one programmer, but no more" or whatever.<p>The thing is people would rather say "ramen profitable" than break-even. Sure, ramen profitable has a specific meaning with more nuance, but it also has the magic word "profit" in it.<p>I think founders and investors should both work towards more level headed straightforward language.<p>I've been watching a lot of startup pitches lately, and combined with what I've seen in the last 2 decades, hyperbole has become quite the turnoff. Maybe it works on investors, they sure all seem to do it (e.g.: watch the Founder Fuel pitches) but for me it undermines credibility.<p>Kinda like dealing with a used car salesman-- have I got a startup for you! It has the most excellent traction you've ever seen!
Disagree completely. EDIT: it's an important distinction to make, and when you say "profitable since day one" obvoiusly nobody expects that you made seventeen thousand dollars in sales your first day. Maybe there is a better word for it (scantily profitable over the direct-but-not-opportunity-costs since day 1?) but if it's something you can claim, go ahead and do so for contextualization. This is why:<p>There's a whole type of startup (call it type "1" whereas article is about type "2"), which is more traditional, and the only possible model in many sectors such as hotels, restaurants, retail, etcetcetc, that is based on launching a business (as opposed to 'bootstrapping') from sizeable funds - often 20k-50k or more - and not even attempting to become profitable within 3-5 months, during which you expect to continue to pay out one or two thousand on office rental space, equipment, hosting, whatever. An optimistic plan is to scratch the surface of breaking even around the one year mark.<p>When someone is, and has been, "profitable" since day one, ("type 2") this is in stark contrast to this model. This is the "in our first few months we spent three-fifty on hosting while servicing our five paying customers and working hard coding and developing so we can grow our customer base and make our equity worth enough to sell some of it and raise a round, or at least have enough money coming in to grow organically and bootstrap to sizeable revenues."<p>There's nothing wrong with either of the two models. It's also probably the most important fact you need to know to contextualize a conversation about your business. And the type 2 business that has paying customers but can't even meet it's hosting bills is fundamentally broken. Hell, I can do that just by hosting up to five hundred gigabytes of files per person for five dollars per decade.<p>If you're not broken - and running this type of model - go ahead and boast. And if boasting isn't enough, keep growing.
I normally agree with Jason but I don't think he should be so upset on this one. "ramen profitable" the amount of profits you have to plow back into the company are as much as the cost of a Ramen package. It is a way of saying you're not profitable to a significant degree, but you are covering your expenses and thus you're not in the process of dying. This is an important milestone, because it means the company is sustainable and the stress level on the founders is going to be a lot less than ones who are slowly depleting their life savings (or quickly depleting it.) And it also means that any additional money will be going into growth, rather than into keeping the startup alive. This is pretty important, or should be, to investors.<p>I think this is a much better metric to seek than the "we've grown our user base by 1 million percent!" from a company that isn't taking in any money from its users, and whose users would never pay money to use the service (perfect example: Facebook) but <i>has</i> also gotten $1M+ in investment and has spent significant money. How do you tell the difference between that and buying users? The latest thing these days is to say "we got X users and we didn't spend any money on marketing".<p>Really? So you don't know what your acquisition cost really is? You want me to think that your social network for accountants is going viral? When your user base is about the size I'd expect it to be when all the other "Social Network for X" founders from Angel.co show up to see what you're up to?<p>Back to the article-- I think he's spot on to point out the difference between ramen profitable and profitable enough to hire an employee who's getting a real salary. That is another milestone.<p>But I think "we're profitable from day one" is really not a bad thing, because many of the other companies out there have no path to profitability without a whole lot more funding (Eg: Facebook, which took a lot of money.) It did pay off for Facebook, but your social network for taxidermists is not another Facebook.<p>So, "we're profitable from day one, even though we're only covering operational expenses and not covering employee living expenses yet" is still a significant piece of information compared to the companies that will take another $5-$50M to get even to that point.<p>Also, FWIW, my startup, which will likely be "profitable from day one" (but not ramen profitable) will be requiring about $300 a month in hosting-- and that's getting a dirt cheap deal. Not all of us are just a website that can run on a single server... we're building a cluster of dedicated machines and we need to do that before we open the doors. Fortunately, $300 a month for ~5-6 dedicated machines is kinda amazing![1] This is also one way where "immediately profitable" is more achievable than it was a decade ago.<p>[1] Hetzner.de has dedicated machines for cheap. Our product is very amendable to a CDN, and our major partner is hosting a lot of the higher bandwidth stuff on their own global CDN anyway, so locating in germany is not nearly the issue it would be for us if we were doing a social network for philatelists.