
Stop claiming you’re profitable - pathdependent
http://blog.asmartbear.com/ramen-profitable.html
======
paulsutter
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).

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.

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.

Just be clear so that you're understood, in context.

~~~
tptacek
Note that "ramen profitable", as I understand the term, means "throwing off
enough money that the operators of the business can pay for adequate shelter
and enough ramen-quality calories to avoid starvation".

That sounds like a pedantic distinction but it's not: ramen-profitability have
runways denominated by the willpower of the founders, not extrinsic factors
like "founders will soon be homeless".

Beer-money profitable carries none of the same connotations.

~~~
lmkg
I don't think that GP were saying "ramen-profitable" and "beer-profitable"
were synonyms, just that both terms are sub-categories of the more general
term "profitable." If you're talking to a VC, you should prefer one of these
more specific terms.

------
_delirium
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 _profitable enough_ 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.

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.

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."

~~~
Swizec
In some (many? most?) countries you are legally required to pay yourself at
least the minimum wage. Even if you are the sole proprietor and sole employee
in the business.

Minimum wage might not be enough to "live" on, but it should be enough to
survive on.

Or maybe this is a recent-ish development where I live because people were
using small businesses to avoid paying taxes, retirement funds and so on. Or
maybe the government has just recently-ish started really clamping down on not
paying yourself a minimum wage. Not really sure about the specifics.

~~~
thejteam
This depends on the business structure. In the US, if you have what is called
an 'S' corp, then you are required to pay yourself a market rate salary.
Otherwise, you are dodging social security, medicare, and other employment
taxes. If you have a 'C' corp(as most startups seem to have) then you pay a
separate corporate tax so you aren't really dodging taxes. Sole proprietors
and LLCs pay "self-employment" tax on pass through earnings, so there is no
tax dodging.

~~~
tptacek
S Corp owners are _not_ required to pay themselves market salaries.

What they are required to do is account for their income as if at least a
market-salary's worth of it was salary.

You can pay yourself $1/year at an S Corp and be just fine, as long as you
don't also issue yourself $200,000 in distributions in that same year and
claim to have earned no salary.

This is because ( _this may set off a little brush fire in the threads, but
hey, it beats the silly semantic argument over what the word "profitable"
means_ ) S Corps are a giant scam.

For the benefit of the class:

An S Corp, like an LLC, is a pass-through tax entity: the tax liability in an
S goes straight to the owners.

LLC owners generally don't make salaries _at all_. They are paid entirely in
distributions (ie, "profit sharing"). LLC owners are subject to self-
employment tax on all that income; in fact, an LLC owner must typically pay
taxes quarterly, instead of at the end of the year as W2 employees are
accustomed. The LLC structure does not (that I know of) afford a huge and
obvious opportunity to cheat on your taxes.

Owners of S Corps _do_ take salaries, and do withholding in much the same way
as a W2 employee would.

Additionally, as company owners, S Corp owners routinely pay themselves
bonuses (profit sharing, distribution, whatever you want to call it). This is
normal and reasonable. The business does well, payroll is made, money is
reinvested in the company, and what's left over is distributed back to the
owners.

The scam is that this money is not for tax purposes treated as payroll. In
particular, that money isn't subject to FICA.

As a result, S Corp owners are incentivized to claim the lowest possible
salary (today, "lowest" meaning "lowest you could reasonably get away with
calling a market salary"). That's because the salary money is going to be
subject to FICA. If the remainder of what the owner should fairly have been
paid is issued in distributions, that money avoids FICA liability.

And so the IRS case files are littered with lawyers and doctors and dentists
who set up their practices as S Corps and then try to claim the fair market
rate for their participation in the company is, say, $5,000/year ("oh, I only
come in on alternate Tuesdays!"). Their secretaries pay the full bite of FICA
while living paycheck to paycheck, while the business owner makes payments on
a vacation house with the money they save from this trick.

~~~
binarycheese
You comment alone Sir, needs its own blog post. Pretty interesting. My
accountant never told me this.

~~~
lawnchair_larry
A relative of mine is an IRS auditor for small businesses. The cheating S
Corps, as described by tptacek, take up the majority of his time. I got the
same description from him, and he also said doctors were the biggest
offenders.

If anyone is doing this, or interested in doing this, the way they deal with
these cases is as follows: he picks a number based on a combination of what
salary surveys say and what kind of mood he is in, multiplies it by 7 (since
you've probably been doing this for 7 years by the time he gets it, which is
how far they can go back), and assesses that as unreported income. They then
tack on penalties and interest for the tax liability of said income. That
makes for a really bad day.

------
jmduke
Profitable does not mean 'making more money than you could otherwise',
profitable does not mean 'worthwhile', profitable does not mean 'sustainable
without ones founders.'

Profitable means making a profit. End of story.

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.

~~~
Deregibus
It's really a question of how time factors into your accounting. If you're
spending 10 hours to make $50, then it's tough to claim that as a $50 profit
unless your time is worth less than $5 an hour.

Of course there are cases in which your time is worth less than $5 an hour
(you don't have any other prospects for making money). Or if you enjoy what
you're doing it might only be 1 hour of "work" with 9 hours of enjoyment. The
point is that completely ignoring time spent is just bad accounting.

------
Robin_Message
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.)

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.

It's like the old joke: Q: How can you quickly make a million dollars? A:
Invest two million dollars in $TOPICAL_RISKY_ACTIVITY

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).

But if you're living off savings and working full time on it, and it's making
$1000 dollars a month, its not profitable.

------
padobson
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?"

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"

~~~
sharkweek
There was a Shark Tank a few months back of a guy starting a "design your own
shoes" clothing company -- When Mark Cuban asked him what salary he could
comfortably live with, the guy said "I guess I could be comfortable with
anything over six figures"

Of course Cuban then said he was out, stating he wanted the kid to be sweating
on a mac 'n cheese diet in order to ensure he was working his ass off as
opposed to living the "LA lifestyle." Was a pretty interesting conversation,
because the kid was currently turning a decent profit already and claimed he
had already done the blood sweat and tears thing.

~~~
nirvana
I saw it. That shoe guy is exactly the kind of guy you should fund. He wasn't
saying he demanded a high lifestyle income they were asking what he was
working _for_ and then they pretend like he was expecting that _now_.

The whole show is really quite hilarious. I think it gives people the wrong
impression though.

The sharks pass if a company is profitable and the owner wants a fair
valuation. The sharks pass if the company has no traction yet.

What the sharks really bite on is profitable companies (or high potential
companies) where they can get a controlling stake for cheap, or a minority
stake for super cheap.

The show is correctly named, that's for sure.

~~~
GFKjunior
I recently saw this episode and you misheard.

He did say that he wanted a 6 figure salary to "live the L.A. life", and he
repeated that statement more than once.

I like the show but agree with a lot of your points, my understanding is that
these pitches are more than an hour so we only get to see the "juicy" parts.

------
mindcrime
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.

Pretty much a useless article, as far as I can tell.

~~~
tptacek
Wow do I ever think you (and even 'damoncali below) are wrong about this. This
is the opposite of a "useless post". This is a post about how lying to
yourself about the definition of "profitable" can cost you tens of thousands
of dollars.

The idea Cohen is expressing is so extraordinarily simple it would almost be
banal, if it didn't target such a widely held misconception:

 _You cannot factor out opportunity costs when accounting for your business_.

When a new founder with a business throwing off $1500/mo after line-item costs
like hosting claims to be "profitable", what they are effectively saying is
that their own time is worth $0/mo.

In reality, that founder is almost definitely losing at least $11,000 per
month --- by taking a SWAG at what any person capable of booting up a product
to reliable $1500/mo can earn as an employee or freelance consultant, that
SWAG being almost certainly so lowballed as to be insulting.

To my mind, not being able to tell the difference between "profitable to the
tune of $1500/mo" and "losing 5 figures a month" is an alarming difference
that is very much worth calling out.

~~~
benjaminwootton
Again, what is the entrepreneur is happy with this scenario?

Say you can earn $20k a month as a consultant.

If you are only making $19k from your own small business, are you therefore
making a loss?

I would take the latter scenario all day long. If that's a loss, please bring
it on.

~~~
hythloday
That's more like "I took a pay-cut in exchange for a better quality of life",
which is understandable and totally a choice I might make. But the important
bit is that you would, in fact, take a pay-cut.

------
benjaminwootton
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.

There is also the potential that the $1k will grow over time.

I therefore don't think it's reasonable to value my time at $10k for the
purpose calculating my profits.

[The figures will obviously vary on a person by person basis.]

More broadly, I view this from the E-Myth [1] perspective:

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.

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.

[1] <http://www.e-myth.com/>

~~~
paulsutter
I left Apple to start my first business in 1991.

A year later I ran into my former boss from Apple when I was out eating lunch.
He asked how it's going, I said well. Then he asked, "Ok, are you making more,
or less, than you were at Apple?"

Embarassed by the question, I admitted the answer was "more".

I think his question captured perfectly the real issue here.

~~~
mindcrime
_I think his question captured perfectly the real issue here._

I guess it depends on your perspective. If the only goal of doing a startup is
to make more money, then sure. But if your goals involve having more control
over your own destiny, fulfilling a desire to build something for the sake of
building it, or having a kind of freedom you could never have when working for
$BIGCORP, then it doesn't really matter if you're making more or less than you
would at $BIGCORP. As long as you are either "ramen profitable" or have runway
left to burn, you still have a shot at fulfilling that ambition, which is what
matters, IMO.

------
jwingy
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.

~~~
true_religion
Let's not redefined profits to mean "this busienss can pay for X people's
salary".

What if I have five businessses, but none can pay for my salary individually,
though in aggregate they make me fairly well off.

Can't I call any one of the busineseses (seperate entities, mind you, not just
apps in the store) profitable?

~~~
randomdata
One of my businesses can easily pay the wages of an employee for the time they
are needed, but being highly seasonal work, it would not pay for an employee
year round. Or to put it another way: On a per hour of work basis, it makes a
programmers salaries look like chump-change, but amortized out to a yearly
income it's not enough to sustain a living.

Is that profitable?

~~~
lmm
Sure - that's the same as "my business is profitable, but can't afford to hire
another employee yet", only it's a fractional employee that you can't afford
to hire.

------
andrew93101
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.

In my mind, a business that excludes the time spent by its founder from its
expenses is not honestly assessing its profitability.

~~~
mindcrime
_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._

Right, but if somebody is selling you something, you're going to do due
diligence and probe this stuff. If it turns out that they are only
"profitable" in the narrowest sense, but not "sustainably profitable," then
that's a good thing to find out.

------
brudgers
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.

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.

------
thejerz
I'm not going to say the author stole my post from yesterday, but it sure is
eerily similar... What a coincidence!

[http://jerzygangi.com/2012/06/17/youre-making-money-but-
are-...](http://jerzygangi.com/2012/06/17/youre-making-money-but-are-you-
making-a-profit/)

<http://news.ycombinator.com/item?id=4126955>

------
daemon13
Having worked in finance 16 years, I do not understand this fuss about
semantics - "ramen", "beer", "sushi" ... profitable.

For starters, for any business, let's look at the numbers:

\- market size, market share, market dynamics

\- gross & net revenue - abs $ and % growth

\- gross margin, gross profit, operating income, net income - abs $, % of
revenue & % growth

\- Balance Sheet, Income Statement and Cash Flow

Then we can talk semantics.

Edit: formatting

------
yonasb
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"

Most posts like this just bitch and moan, but he actually provides valuable
advice.

------
nutjob123
"profitable" is not equal to true or false. People who understand business use
numbers to represent it and evaluate accordingly.

------
its_so_on
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."

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.

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."

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?

Get real. From an investment standpoint, nobody cares about the founder's
development time. And guess what the article is about? Investment standpoint.

~~~
tptacek
Nobody disagrees with this. If the business runs without your consistent
involvement, the value of your time doesn't factor in, because your time isn't
one of the costs of the business.

If you have a business that throws off $1500/mo and requires _one hour_ of
your time in each of those months on average, you absolutely are ~$1300/mo
profitable. That much is obvious.

The problem is when your business is throwing off $1500/mo and you are
spending more than 8 hours on it in a month.

~~~
its_so_on
The author does disagree with this. He's saying if you're still sinking your
time into the development, you have to subtract it from sales before you can
cry "profit!", even if the profit is the result of previously sunk development
costs that don't require ongoing involvement. The author doesn't differentiate
types of development costs on this point. Most Internet development is
invested into future profit: it's not standing in front of your lemonade
stand.

~~~
tptacek
He's right about that.

Nobody, however, is saying that once you've recouped your investment, your
hourly bill rate needs to somehow factor into your profitability.

~~~
its_so_on
I will just say that people very much _are_ saying that. You're pretty much
saying that as demand for you goes up and down elsewhere, the profitability of
your business goes up and down. And if someone wants to make your business
unprofitable, they can just offer you a hundred million dollars to go work for
them and drop it - even if you continue on the business, it's suddenly
unprofitable.

This is obviously totally false.

Let's do this thought experiment.

Say I would accept this if the author said that true profitability is only the
amount that the company would clear if you spent less than a minimal
frictional amount of time hiring someone (from company revenue) at rock-bottom
wages, to keep running the company.

but if we accept this, notice something interesting. What if the way to get
someone at rock-bottom wages is for the company to issue some shares (which
means a percentage) and pay the worker in those shares?

Can the company still be profitable (though you're diluting the profit) on
those terms? From your point of view, OF COURSE!

The author is talking about the point of view of an investor. ("Stop telling
me your company is profitable.") He's not arguing from the point of view of
what's worth your time: "stop thinking that if you're profitable it's worth it
for you to do that."

The two are totally distinct. If the company has someone on payroll at $0
because they think their work is worth investing in exchange for the 30%
equity they have, then the profit the company generates for the 70%
stakeholder who doesn't have to put time in is simply 70% of company revenues
minus company expenses such as hosting.

That doesn't mean the person who is working for $0 and equity isn't getting
screwed. But it also does't mean the company isn't profitable.

The whole article is completely wrong and I've told you why here and in my
other comments.

Would you buy a company for a thousand dollars that had paper profits of five
thousand dollars a month and will for the next two years, but actually this
isn't "real profit" because the founder, who had been earning five hundred
thousand as a President at Microsoft, put five years of labor into it unpaid?

Of course you would buy it. That's real profit the company's making. It
doesn't have to recoup the founder's lost opportunity cost over the ENTIRE
life of the company in order for it to be a profitable company.

------
nirvana
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.

The thing is, people want to use the term "profitable" because they want to
spin where their business is at.

Operationally break-even would mean your income exceeds your hosting expenses.

Breakeven sans salaries, would imply that you're ramen profitable but nobody
is getting paid.

And from there you could say "we're profitable enough to hire one programmer,
but no more" or whatever.

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.

I think founders and investors should both work towards more level headed
straightforward language.

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.

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!

------
its_so_on
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:

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.

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."

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.

If you're not broken - and running this type of model - go ahead and boast.
And if boasting isn't enough, keep growing.

~~~
tptacek
You haven't rebutted his point at all. Jason Cohen been around the block a
couple times. He saw the "type 2" startup argument coming and addressed it
very early on. Specifically: you are _losing money_ if you are not accounting
for the fair market value of your time, no matter what your pro forma cash
flows in Excel tell you is going on.

Also: if the only reasonable trajectory for your business is to "raise a
round"...

This, it seems to me, is one of the most common mistakes people make when
talking about their businesses on HN.

~~~
its_so_on
Well, what do you suggest instead of "profitable"? It's an extremely useful
fact and contextualization, and obviously no one thinks you _really_ mean
"profitable"? What do you suggest we call it? "monetarily self-sustaining
hobby that pays for the direct - but not opportunity - costs the founders, er,
hobbyists, incur in, uh, playing with it, which they are doing in the hopes
that beyond paying for the current direct costs, in the future the hobby's
revenue is able to be used, either through sale of the hobbyist's ownership at
a rate commensurate with a multiple of the hobby's then-present revenues and
which valuation will factor in the ability - as of the extent to which it will
have been proven by that future date, of the founders to use outside money to
generate value for the outside shareholder, -- or, in lieu of such a sale of
ownership, through sufficient growth of revenue, to have made the hobby a more
valuable use of the founders' time, in retrospect, than the amount of money
they lost by not doing something different?"

I humbly submit that "profitable from day 1" (or day 7 or 14 )is a useful
shortcut to name all of the above. Of course it doesn't mean _really_
profitable.

But it also doesn't mean that you're hosting a news a blog that has
readerships but hasn't made a penny.

~~~
tptacek
Profit = Revenue - Costs.

The mistake Cohen is talking about is mostly about not fully accounting for
costs.

If, after factoring in opportunity cost (ie: what your full-time salary would
be had you done something other than start your venture), that equation
produces a _negative number_ , you are not "profitable".

It's weird that this should generate so much controversy. The concept of
opportunity cost is not controversial among businesspeople, among investors,
or among economists.

The term you are looking for to describe the "kind of profitable" to which
you're referring is "cash flow positive".

~~~
btilly
That actually isn't his point. He's very clear that what he's talking about is
that your cost of living should be counted as a business cost. Once your
business is covering your cost of living, he says that you should count it as
profitable, even though you're not yet making the salary that you could.

~~~
its_so_on
But that's obviously stupid. See my other comments. If you stop working on it
and pay someone 800 per month to maintain it and do nothing else, and ten
years later the account payments go into has 200k in it, what, is that 200k
from another dimension? This is so obviously wrong. The article is completely
wrong economically, and can be summarized as: "Don't say you're profitable
from day 1: say what you mean, that your business is cash-flow positive with
respect to its own business expenses other than your original time in
developing it." whoop-de-doo. not an important semantic distinction, but I
will grant the author it.

I will not grand the author the contention that you shouldn't tell people if
this is the case.

~~~
btilly
The difference is that the author is implicitly assuming that you've got a
business that requires your active involvement to keep going.

If the business requires 0 energy from you, and makes money, then his point
becomes much less relevant. But most of the businesses in question are not
like that. You have paperwork to keep them going, decisions to make, customers
to serve...

------
nirvana
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.

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 _has_ 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".

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?

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.

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.

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.

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.

[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.

