The expression "ramen profitable" ("a company whose profit is only enough for a doshirak") has gained wide popularity among us, and I would like to clarify what exactly it means.
Doshirak-profitable is a startup company whose income allows it to cover the living expenses of its founders. Traditionally, startups have sought a different form of profitability. Typical profitability arises when large costs start to pay off, while preshirak profitability saves you time. [one]
Previously, a startup became profitable only after investing a fairly large amount of money. For example, a computer hardware company could spend $ 50 million over 5 years and not generate income. But over time, the company's profit was $ 50 million per year. Such profitability meant that the startup was successful.
With preshirak profitability, the situation is different: a startup is considered profitable, which begins to generate income after two months. And while the profit is only $ 3,000 a month, it turns out to be enough, since the only employees are a couple of 25-year-old founders who do not need much to live on. However, a profit of $ 3,000 per month does not mean a company's success. But such a company has one thing in common with a profitable one in the traditional sense of the word: you do not need to look for money to survive.
The idea of preshirak profitability is not widely known to anyone because it has become feasible only recently. And it remains impossible for many startups, such as biotech, but is quite suitable for low-budget software companies. Indeed, for many of them, the only production costs are those of their founders.
An important feature of this type of profitability is independence from investors. Normally, a startup that is not profitable is forced to either attract more investment or close. But if he works according to the principle of pre-shirak profitability, then he is deprived of this painful choice. It is possible to attract investments, but it is not necessary.
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The absence of the need for money has an obvious advantage - that you can work on more favorable terms. Knowing that a startup needs money, investors can take advantage of the position. Some may deliberately delay the deal, realizing that once the founder is broke, he will become more compliant.
There are also three less obvious benefits of preshirak profitability. One of them is that a startup is becoming more interesting to investors. If he receives income, no matter how small, it means that (a) they managed to find at least some kind of investor, (b) the founders are serious about creating what is in demand, and (c) they are disciplined enough to keep expenses at a low level.
This is encouraging for investors as their three main doubts have now been dispelled. They usually sponsor companies with smart founders and a large market, but they fail nonetheless. Such companies go bankrupt, usually because (a) there are no buyers for their products, for example, because the product was too difficult to sell or the market was not ready, (b) the founders did not pay attention to the needs of the consumers, dealing with the solution the wrong tasks, or (c) the company wasted money before making a profit. If a startup achieves preshirak profitability, then it has already managed to avoid these mistakes.
Another benefit of preshirak profitability is employee morale. When founding a company, the founder represents it in theory. Although legally it is a company, it doesn't feel like it could be called that. Only when substantial amounts of money begin to be paid can the company be considered real. And the founders' own expenses will testify to this, since from this moment the state of affairs will change. You will no longer need to think only about survival.
At this stage, a lift in spirit is extremely important for a startup, since it is the moral side of managing the company that is difficult. There are still not many startups. What is stopping people? Financial risks? Many people in their 25s still have no savings. Long working day? Many are overworking in regular positions. Fear of responsibility keeps people from starting a startup. And this fear is not at all reckless: it is really difficult to overcome. By eliminating this burden, founders increase the company's chances of survival.
The chances of success for a startup reaching preshirak profitability are very high. This is quite interesting when you consider the following bimodal distribution of results in startups: either bankruptcy or prosperity.
The fourth benefit of preshirak profitability is the least obvious, but probably the most important. There is no need to interrupt work in the company to find money.
Attracting investment is very distracting. The founder is lucky if his productivity is one third of the previous one. And so it can go on month after month.
Until this year, I didn’t exactly understand (or rather didn’t remember) why the search for money was so distracting. I noticed that the startups that we funded slowed down their development when they started looking for investments. But I didn't understand why exactly until it happened with YC. It was not a big deal for us - the very first investors answered me with consent. But then it took several months to work out the details, and during this time I hardly had time to do any real work. Why? Because I was constantly thinking about money.
At each time period for a startup, one problem is most relevant. This is what you think about before going to bed at night and in the shower in the morning. And if you start looking for money, it becomes the problem you think about. You only take a shower once in the morning, and if you think about investors at this time, then you are not thinking about the product.
Whereas, given the opportunity to choose the moment to search for investments, the founder is more likely to do this, freeing himself from other tasks. And, probably, he will be able to speed up the process of completing negotiations and even free himself from constant thoughts about him, since it will not be fundamentally important for him when they are completed.
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The definition of a "doshirak-profitable company" can be understood literally. Such profits, as a rule, are not enough to independently "push" a startup, that is, to do without the help of investors. Experience shows that this happens very rarely. Few startups have succeeded without investor investment. Perhaps, when startups become cheaper, there will be more cases of success without investors. On the other hand, money requires investment. And if startups need them less, then they are more willing to take them on more favorable terms for themselves. This is what will lead to balance. [2]
Likewise, a preshirac profitable startup doesn't follow Joe Kraus's idea that when beta testing a product, you should test the business model. He believes people should pay you from the start. I think this is too restrictive. Facebook has been successful without it. They did not seek to make money right away. Such a desire could be disastrous for the company. However, Joe's idea could be useful to many startups. When I see that the founder is at a loss, I sometimes advise him to do something that the buyer can pay for. I hope that such a condition will push them to action.
The difference between Joe's idea and doshirak profitability is that a company that is considered doshirak profitable does not have to immediately make money in the same way that it will eventually earn it. She just has to make money. The most famous of these startups is Google, which made its first money by selling licenses for its search technologies to sites like Yahoo.
Are there any disadvantages to preshirak profitability? Probably the biggest danger is that you can become a consulting firm. Startups should be manufacturing companies, that is, create a single product for everyone to use. A distinctive feature of startups is that they grow very quickly, and a consulting company, unlike a manufacturing company, cannot afford large-scale growth. [3] On the other hand, it will not be difficult for a consulting firm to make $ 3,000 a month. In essence, this is a low rate for contract programming. Thus, the founders may want to go into consulting and convince themselves that they have a pre-shirak profitable startup, when, in fact, it is not a startup at all.
The founders may have to deal with consulting at first. All startups have to do some pretty weird things at first. But remember that profitability is not your goal. The goal of a startup is to grow as much as possible, and preshirak profitability is a trick to avoid dying on the way to that goal.
Notes
[1] "Doshirak" from the expression "doshirak-profitable" means affordable and cheap instant noodles.
Please do not take this expression literally. Eating instant noodles every day is unhealthy. Rice and beans are much healthier. I advise you to start by investing in a rice cooker.
Rice with beans (2 servings)
- olive oil or butter
- bulb onions
- fresh vegetables to taste
- 3 cloves of garlic
- 330 ,
- 1 Knorr
- ,
Place the rice in a rice cooker. Add water as directed on the package (or 2 cups of water per cup of rice). Turn on the rice cooker and forget about it.
Chop the onions and other vegetables and sauté in oil over low heat until the onions are golden brown. Add chopped garlic, pepper, cumin and a little more oil and stir. Continue to cook over low heat for another 2-3 minutes, then add the beans (do not drain the juice) and stir. Add bouillon cube, cover and cook over low heat for at least 10 minutes. Stir occasionally to keep the ingredients from sticking together.
Save money by buying beans from huge cans at discounted prices. Spices are also cheaper if bought in packs. And in an Indian store you can buy a bag of cumin for the price of a can from a supermarket.
[2] If influence shifts from investors to founders, the growth of venture capital is possible. I think investors are making a big mistake by being rude to founders. If they were forced to stop doing this, all VCs would be able to perform better, and we would witness the growth in trade that usually occurs when restrictive laws are lifted.
Investors are the biggest headache for founders. If they didn’t bring so many problems, it would be much nicer to be a founder. And if it was pleasant to be a founder, many would become one.
[3] There is the potential for a startup to grow from a small consulting firm to something larger. But in this case, it will become a production company.
Translation: Egor Zaikin
If you want to help with translations of useful materials from the YC library, write in a personal, @jethacker cart or mail alexey.stacenko@gmail.com
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