Re:You're Ramen Sustainable
by adamtmca on Friday October 21, 2011 @02:31PM
(#3141027)
This article is just describing/ confusing the difference between accounting profits and economic profits.
"That's a wonderful thing, but from an accounting perspective, just because you're not properly calculating expenses, doesn't mean it's profit. To be fair and more accurate, founders should look at their fair market value to determine actual profitability."
No. From an accounting perspective you "calculate" things based on what you actually paid or were paid.
"If you weren't charging yourself any rent for that space, nor paying yourself anything, and the business made $100/day, would you really consider that profitable? You could have rented the space out at fair market value for much more money than that. I'd argue you're losing money -- and I'd be right."
No, you'd be wrong. They are making $100.00 a day. This is a very poor return on equity but it is still a profitable endeavour.
Accounting profits = Revenues - expenses. Economic profits (what he is unknowingly talking about) = Accounting profits - opportunity cost.
Re:You're Ramen Sustainable
by dignan on Friday October 21, 2011 @02:59PM
(#3141148)
A valid point, but I think you're getting stuck on the semantics of what he's saying and missing the point he's trying to make: you shouldn't stay stuck on one idea once it's clear it won't go anywhere, even if you're "ramen sustainable". Of course, everyone has a different idea of when an endeavor should be abandoned, don't they?
Re:You're Ramen Sustainable
by dshah on Friday October 21, 2011 @03:30PM
(#3141278)
You're right, that was the point I was trying to make.
One of the hardest decisions an entrepreneur faces is deciding when it's no longer optimal to keep pursuing an idea that just doesn't look like it's going to take off. If the founder is super-passionate about the idea, fine. But, there are likely founders that get to ramen sustainability, and find it even harder to "let go" because there's no external impetus to do so.
Re:You're Ramen Sustainable
by MicahWedemeyer on Friday October 21, 2011 @04:10PM
(#3141453)
But, that's also the problem with Ramen Sustainable startups. The entrepreneur may keep going longer than would have been warranted, instead of moving on to their next big idea.
The assumption here is that the next big idea will be anywhere near as successful. I don't know about you guys, but I see way more businesses fail before they reach ramen profitable/sustainable/whatever than after. I know plenty of people who make $100 a month from their business. I know very few who make $10,000 a month.
If you're at the ramen stage, it's probably time to reexamine your end goals. If you're looking for a super-big exit, maybe your current path doesn't lead there and you have to hit the reset button. But, if you're like me, and all you want is a boss-free business of your own, tweaking your ramen into a comfortable lifestyle might not be too far off.
Re:You're Ramen Sustainable
by oniTony on Friday October 21, 2011 @01:51PM
(#3140856)
It's easy to calculate dollar value opportunity cost of closing shop and getting paid Big Corp Inc.'s salary. It's really hard to calculate utility value of running a hipster gelato bar and hanging out with fellow developers all day.
Re:You're Ramen Sustainable
by bfe on Friday October 21, 2011 @05:22PM
(#3141770)
The infinite runway is the key point of "ramen profitable", not comparison with market wages. The latter differs enormously between a founder who just dropped out of college versus one who's switching out of a highly successful position in mid-career, but that doesn't make a difference to the startup's likelihood of success.
And, even though the difference in lost market wages can be relatively giant, it's still negligible relative to the potential of a startup to create something new and incredibly valuable and to change the world.
Re:You're Ramen Sustainable
by JoshTriplett on Friday October 21, 2011 @02:25PM
(#3140999)
This seems like an interesting semantic distinction. Certainly it seems worthwhile to consider how much you could make if you took a standard salary, or otherwise got paid more for your time. On the other hand, "profit" literally means "revenue minus costs", and "ramen profitable" thus seems straightforward: "enough profit to keep the founders in ramen (and rent)". Opportunity costs don't actually represent costs in the "revenue minus costs" equation, even though they seem worth considering.
Re:You're Ramen Sustainable
by nroach on Friday October 21, 2011 @03:59PM
(#3141396)
To me, the most important point is not the semantic difference between "profitable" and "sustainable" but instead the author's invocation of opportunity cost: "You could have rented the space out at fair market value for much more money than that. I'd argue you're losing money."
While it's nice to have the security of an infinite runway, if the value created by staying on that path is less than following a different path, then overall it's a net loss.
Re:You're Ramen Sustainable
by rflrob on Friday October 21, 2011 @04:13PM
(#3141460)
It seems to me that Ramen Profitable is a narrow enough window that a given startup isn't likely to stay there for long. Either it will continue on to become Unqualified Profitable, or it will hover there for a few months (which isn't that long in the grand scheme of things) before falling back to unprofitable.
Extending the runway metaphor just a bit too far, when an airplane is within about 1 wingspan of the ground, it gets benefits in lift and drag from ground effect, but almost nobody flies there for very long because you're still really close to the ground.
Re:You're Ramen Sustainable
by jessriedel on Friday October 21, 2011 @01:48PM
(#3140843)
If you're only calling it "Ramen profitable" if you're making profits after paying yourself fare market wages, how is this different from regular profitable?
Re:You're Ramen Sustainable
by drewcrawford on Friday October 21, 2011 @02:12PM
(#3140934)
I've always understood it to be "Ramen profitable" as opposed to, say, fancy-steak-and-a-five-star-hotel profitable. e.g. barely profitable (or in this case, sustainable, argues the OP).
"That's a wonderful thing, but from an accounting perspective, just because you're not properly calculating expenses, doesn't mean it's profit. To be fair and more accurate, founders should look at their fair market value to determine actual profitability."
No. From an accounting perspective you "calculate" things based on what you actually paid or were paid.
"If you weren't charging yourself any rent for that space, nor paying yourself anything, and the business made $100/day, would you really consider that profitable? You could have rented the space out at fair market value for much more money than that. I'd argue you're losing money -- and I'd be right."
No, you'd be wrong. They are making $100.00 a day. This is a very poor return on equity but it is still a profitable endeavour.
Accounting profits = Revenues - expenses. Economic profits (what he is unknowingly talking about) = Accounting profits - opportunity cost.
One of the hardest decisions an entrepreneur faces is deciding when it's no longer optimal to keep pursuing an idea that just doesn't look like it's going to take off. If the founder is super-passionate about the idea, fine. But, there are likely founders that get to ramen sustainability, and find it even harder to "let go" because there's no external impetus to do so.
The assumption here is that the next big idea will be anywhere near as successful. I don't know about you guys, but I see way more businesses fail before they reach ramen profitable/sustainable/whatever than after. I know plenty of people who make $100 a month from their business. I know very few who make $10,000 a month.
If you're at the ramen stage, it's probably time to reexamine your end goals. If you're looking for a super-big exit, maybe your current path doesn't lead there and you have to hit the reset button. But, if you're like me, and all you want is a boss-free business of your own, tweaking your ramen into a comfortable lifestyle might not be too far off.
And, even though the difference in lost market wages can be relatively giant, it's still negligible relative to the potential of a startup to create something new and incredibly valuable and to change the world.
While it's nice to have the security of an infinite runway, if the value created by staying on that path is less than following a different path, then overall it's a net loss.
Extending the runway metaphor just a bit too far, when an airplane is within about 1 wingspan of the ground, it gets benefits in lift and drag from ground effect, but almost nobody flies there for very long because you're still really close to the ground.
In fact, one could argue that living on Ramen and the bare minimum is NOT sustainable, but theoretically profitable, and gets you by in the meantime.
Of course, maybe I'm overthinking this and the author is just milking a reference to paul graham for clicks.