Should Your Startup Prioritize Profits or Growth?

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Date: 03.03.2018

As programming languages become simpler and distribution becomes cheaper, starting up a company on the internet continues to become cheaper and cheaper. Until recently it was unfeasible to bootstrap a company, but nowadays more and more bootstrap companies are finding success.

This seems to go against high-growth strategies that companies like Uber, Slack, and Facebook have used to become market leaders. High-growth startups fund their growth with lots of outside capital that they pay back after saturating their respective markets and pivoting to a profit model.

We’ve stitched together essential excerpts from articles written by Paul GrahamMark SusterFred Wilson, and Jason Fried that give their thoughts on this growth vs. profits debate. The full articles are linked to at the bottom of each section.

In the past, a startup would usually become profitable only after raising and spending quite a lot of money.

Ramen profitability is the other extreme: 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.

The main significance of this type of profitability is that you’re no longer at the mercy of investors. If you’re still losing money, then eventually you’ll either have to raise more or shut down. Once you’re ramen profitable this painful choice goes away. You can still raise money, but you don’t have to do it now.

The most obvious advantage of not needing money is that you can get better terms. If investors know you need money, they’ll sometimes take advantage of you. Some may even deliberately stall, because they know that as you run out of money you’ll become increasingly pliable.

But there are also three less obvious advantages of ramen profitability.

  1. You’re more attractive to investors. If you’re already profitable, on however small a scale, it shows that (a) you can get at least someone to pay you, (b) you’re serious about building things people want, and © you’re disciplined enough to keep expenses low.
  2. Ramen profitability is good for morale. A company tends to feel rather theoretical when you first start it. When people start to pay you significant amounts, the company starts to feel real.
  3. A startup that reaches ramen profitability may be more likely to succeed than not. Which is pretty exciting, considering the bi-modal distribution of outcomes in startups: you either fail or make a lot of money.
  4. If you don’t need to raise money, you don’t have to interrupt working on the company to do it. Raising money is terribly distracting. You’re lucky if your productivity is a third of what it was before. And it can last for months.

Ramen profitable means no more than the definition implies. It does not, for example, imply that you’re “bootstrapping” the startup — that you’re never going to take money from investors. Empirically that doesn’t seem to work very well. Few startups succeed without taking investment. Maybe as startups get cheaper it will become more common. On the other hand, the money is there, waiting to be invested. If startups need it less, they’ll be able to get it on better terms, which will make them more inclined to take it. That will tend to produce an equilibrium.

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. The defining quality of startups is that they grow fast, and consulting just can’t scale the way a product can. But it’s pretty easy to make $3000 a month consulting; in fact, that would be a low rate for contract programming. So there could be a temptation to slide into consulting, and telling yourselves you’re a ramen profitable startup, when in fact you’re not a startup at all.

A startup’s destination is to grow really big; ramen profitability is a trick for not dying en route.

 

https://medium.com/founder-playbook/should-you-aim-for-growth-or-profits-4-investors-entrepreneurs-weigh-in-1583d6d34c2f

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