15 ms·

Stop claiming you’re profitable

165 points by pathdependent 14y ago

mindcrime 14y ago
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.
- hythloday 14y ago
  I don't think the word "profitable" is the interesting part of the article--rather it's looking for inflection points in the time/utility function of your startup. It's making the point that the interesting point is not when the final figure in some parboiled accounting books is positive, but when you have enough confidence in it to use it as your primary source of income. I'd urge you to re-read it and not fall into the trap of believing he's making an argument on semantics. There's a useful point there.
  - mindcrime 14y ago
    Fair enough, maybe it's just that the headline is misleading. No doubt, that inflection point does matter... But I wish he'd been clearer in saying that that's what he's talking about. But even if we acknowledge that that inflection point is important, what conclusion is he asking us to draw from it? Does acknowledging or not acknowledging this point make much difference to any strategic or tactical decision a hypothetical startup founder is going to make? I mean, if the OP had made a point about "this is how you know when to go raise outside money" or "this is how you know it's time to shut down the "profitable" startup," then I'd have found this valuable.
- damoncali 14y ago
  I think you missed the good stuff. It's a great post about what positive traction looks like wrapped up in a pointless, link-baity, semantic argument.
- tptacek 14y ago
  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.
  - scyscy 14y ago
    Both of you are WASTING YOUR TIME. Now keep worshiping "ycombinator" like they are God--meanwhile, someone stops this comment from showing. I don't care. Internet commenting is a waste of time. Hug your children or something, JEEEZ.
  - mindcrime 14y ago
    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. Is it really? I mean, that makes sense if the only point of being an entrepreneur is to make money, and you're totally fine with working a $DAYJOB as an employee. But, for some of us, it's about more than the money, and fighting to make the startup succeed is totally "worth it" even if "it" is tens, or hundreds of thousands of dollars that we might otherwise have earned as an employee. You cannot factor out opportunity costs when accounting for your business. Indeed.
    - tptacek 14y ago
      If you're happy, you're happy. That's great. But if your company is bringing in $1500/mo after line-item expenses and before wages, you are making less than minimum wage; you are not profitable. Happy? Sure. Profitable? No.
deleted 14y ago
[deleted]
_delirium 14y ago
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 14y ago
  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 14y ago
    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.
jwingy 14y ago
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 14y ago
  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?
  - damoncali 14y ago
    In the context of this article, you have one business.
    - true_religion 14y ago
      According to the article, if you have one business and still work for someone else then the business is not profitable. It basically states that multiple-streams of income means the smallest stream doesn't deserve the definition "profitable". So questions like mine are valuable to fleshing out this theory....
      - damoncali 14y ago
        It's not so much a theory as it is a colorful way of explaining basic entrepreneurial accounting. He's talking about the difference between paying yourself and not, in a round about way of getting to this concept: not paying yourself a sustainable wage leaves nothing for investors (even if the "investor" is just you.) If you have five separate entities that combine to pay you a salary, you win. Any extra money can be used to grow one or more of those businesses. ..if they are all tied together in ownership (for example, they are all owned by one person). If those 5 entities are not tied together in some way, then no, they are not sustainably profitable on their own. That is, each entity does not throw off enough cash so that there is some left over for reinvestment unless you combine them all together.
its_so_on 14y ago
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 14y ago
  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.
andrew93101 14y ago
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 14y ago
  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.
Robin_Message 14y ago
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.
brudgers 14y ago
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.
paulsutter 14y ago
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 14y ago
  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 14y ago
    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.
- morisy 14y ago
  Paul makes a good point, and I think it's one the post addresses -- eventually. Context is everything, both in terms of talking to other people and being honest with yourself. I was a textbook example of the "Profitable since month one" crowd, since our reimbursed expenses < revenue, but when I'd go around saying that from people who started/ran businesses, there were a lot of rolling eyes. It's really easy to look around at huge venture-funded flameouts that have never had a dime in revenue and be proud of what you've built. I know I sure am. But that doesn't mean, at the end of the day, you've created a truly profitable business. That shouldn't take away from what you've done, but it does provide a little more nuance that can be hard to swallow.
benjaminwootton 14y ago
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/ http://www.e-myth.com/
- paulsutter 14y ago
  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 14y ago
    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.
nutjob123 14y ago
"profitable" is not equal to true or false. People who understand business use numbers to represent it and evaluate accordingly.
padobson 14y ago
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 14y ago
  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 14y ago
    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.
    - sharkweek 14y ago
      Agreed -- while I absolutely love watching the show, there have been very few times when I have felt the entrepreneur has gotten a great deal from the sharks.
jmduke 14y ago
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 14y ago
  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.
nirvana 14y ago
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.
thejerz 14y ago
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-you-making-a-profit/ http://jerzygangi.com/2012/06/17/youre-making-money-but-are-... http://news.ycombinator.com/item?id=4126955 http://news.ycombinator.com/item?id=4126955
its_so_on 14y ago
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 14y ago
  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 14y ago
    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.
nirvana 14y ago
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!
daemon13 14y ago
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 14y ago
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.

165 points by pathdependent 14y ago

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.

hythloday 14y ago
I don't think the word "profitable" is the interesting part of the article--rather it's looking for inflection points in the time/utility function of your startup. It's making the point that the interesting point is not when the final figure in some parboiled accounting books is positive, but when you have enough confidence in it to use it as your primary source of income. I'd urge you to re-read it and not fall into the trap of believing he's making an argument on semantics. There's a useful point there.
- mindcrime 14y ago
  Fair enough, maybe it's just that the headline is misleading. No doubt, that inflection point does matter... But I wish he'd been clearer in saying that that's what he's talking about. But even if we acknowledge that that inflection point is important, what conclusion is he asking us to draw from it? Does acknowledging or not acknowledging this point make much difference to any strategic or tactical decision a hypothetical startup founder is going to make? I mean, if the OP had made a point about "this is how you know when to go raise outside money" or "this is how you know it's time to shut down the "profitable" startup," then I'd have found this valuable.
damoncali 14y ago
I think you missed the good stuff. It's a great post about what positive traction looks like wrapped up in a pointless, link-baity, semantic argument.
tptacek 14y ago
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.
- scyscy 14y ago
  Both of you are WASTING YOUR TIME. Now keep worshiping "ycombinator" like they are God--meanwhile, someone stops this comment from showing. I don't care. Internet commenting is a waste of time. Hug your children or something, JEEEZ.
- mindcrime 14y ago
  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. Is it really? I mean, that makes sense if the only point of being an entrepreneur is to make money, and you're totally fine with working a $DAYJOB as an employee. But, for some of us, it's about more than the money, and fighting to make the startup succeed is totally "worth it" even if "it" is tens, or hundreds of thousands of dollars that we might otherwise have earned as an employee. You cannot factor out opportunity costs when accounting for your business. Indeed.
  - tptacek 14y ago
    If you're happy, you're happy. That's great. But if your company is bringing in $1500/mo after line-item expenses and before wages, you are making less than minimum wage; you are not profitable. Happy? Sure. Profitable? No.

deleted 14y ago

[deleted]

_delirium 14y ago

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 14y ago
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 14y ago
  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.

jwingy 14y ago

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 14y ago
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?
- damoncali 14y ago
  In the context of this article, you have one business.
  - true_religion 14y ago
    According to the article, if you have one business and still work for someone else then the business is not profitable. It basically states that multiple-streams of income means the smallest stream doesn't deserve the definition "profitable". So questions like mine are valuable to fleshing out this theory....
    - damoncali 14y ago
      It's not so much a theory as it is a colorful way of explaining basic entrepreneurial accounting. He's talking about the difference between paying yourself and not, in a round about way of getting to this concept: not paying yourself a sustainable wage leaves nothing for investors (even if the "investor" is just you.) If you have five separate entities that combine to pay you a salary, you win. Any extra money can be used to grow one or more of those businesses. ..if they are all tied together in ownership (for example, they are all owned by one person). If those 5 entities are not tied together in some way, then no, they are not sustainably profitable on their own. That is, each entity does not throw off enough cash so that there is some left over for reinvestment unless you combine them all together.

its_so_on 14y ago

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 14y ago
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.

andrew93101 14y ago

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 14y ago
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.

Robin_Message 14y ago

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.

brudgers 14y ago

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.

paulsutter 14y ago

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 14y ago
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 14y ago
  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.
morisy 14y ago
Paul makes a good point, and I think it's one the post addresses -- eventually. Context is everything, both in terms of talking to other people and being honest with yourself. I was a textbook example of the "Profitable since month one" crowd, since our reimbursed expenses < revenue, but when I'd go around saying that from people who started/ran businesses, there were a lot of rolling eyes. It's really easy to look around at huge venture-funded flameouts that have never had a dime in revenue and be proud of what you've built. I know I sure am. But that doesn't mean, at the end of the day, you've created a truly profitable business. That shouldn't take away from what you've done, but it does provide a little more nuance that can be hard to swallow.

benjaminwootton 14y ago

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/ http://www.e-myth.com/

paulsutter 14y ago
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 14y ago
  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.

nutjob123 14y ago

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

padobson 14y ago

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 14y ago
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 14y ago
  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.
  - sharkweek 14y ago
    Agreed -- while I absolutely love watching the show, there have been very few times when I have felt the entrepreneur has gotten a great deal from the sharks.

jmduke 14y ago

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 14y ago
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.

nirvana 14y ago

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.

thejerz 14y ago

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-you-making-a-profit/ http://jerzygangi.com/2012/06/17/youre-making-money-but-are-... http://news.ycombinator.com/item?id=4126955 http://news.ycombinator.com/item?id=4126955

its_so_on 14y ago

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 14y ago
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 14y ago
  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.

nirvana 14y ago

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!

daemon13 14y ago

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 14y ago

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.