March 20, 2021

Entrepreneurship – Ramen Profitability & Airbnb

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‘Ramen Profitability’ is a term that came to prominence following Airbnb’s YC (YCombinator) stint in the Winter 2008/09 Cohort. While a somewhat abstract term on the surface, its meaning carries a lot of relevance for anyone in an early-stage company.

“Airbnb’s goal during YC was to reach what we call ramen profitability, which means making enough money that the company can pay the founders’ living expenses, if they live on ramen noodles. Ramen profitability is not, obviously, the end goal of any startup, but it’s the most important threshold on the way, because this is the point where you’re airborne. This is the point where you no longer need investors’ permission to continue existing.”

The Airbnbs

Following the company’s recent IPO, the man who coined the term back in ’08 wrote a reflective post – The Airbnbs – on what made Airbnb’s three co-founders such an intriguing group (retrospectively) and how those lessons can be applied towards future founders:

What was special about the Airbnbs was how earnest they were. They did nothing half-way, and we could sense this even in the interview. Sometimes after we interviewed a startup we’d be uncertain what to do, and have to talk it over. Other times we’d just look at one another and smile. The Airbnbs’ interview was that kind. We didn’t even like the idea that much. Nor did users, at that stage; they had no growth. But the founders seemed so full of energy that it was impossible not to like them.

The Airbnbs

One of the keys to this passage is the ‘no growth‘ part. Below we see what those metrics actually were thanks to Arena VC’s “My $1 Billion Lesson” post.

My $1 Billion Lesson

“If you looked at the numbers as of September 20, 2008 you would have seen a sharp drop off (around 50%) in users, reservations, and revenue from August to September.”

My $1 Billion Lesson

In the end, the post details how the Arena VC founder unfortunately lost the deal and how Airbnb ended up in YC’s Winter Cohort instead (which comes with an automatic investment round).

Nonetheless, the ‘ramen profitability’ post serves as an example of how the struggling company was able to pivot their strategy once they had the goal literally taped to their mirror:

For the Airbnbs, ramen profitability was $4000 a month: $3500 for rent, and $500 for food. They taped this goal to the mirror in the bathroom of their apartment.

The Airbnbs

Keeping in mind that the company did have $620K in the bank via YC, they were not literally on the ramen diet at that time (although they were previously throughout most of 2008 and 2009).

Crunchbase – YC Stake in Airbnb
LumosBusiness – Airbnb IPO

But their strategy needed a shakeup, and the end result was them moving from San Francisco (where YC was located) to New York (where the majority of their hosts were located) that led to a breakthrough with their on-boarding and management of hosts.

The way to get growth started in something like Airbnb is to focus on the hottest subset of the market. If you can get growth started there, it will spread to the rest. When I asked the Airbnbs where there was most demand, they knew from searches: New York City. So they focused on New York. They went there in person to visit their hosts and help them make their listings more attractive. A big part of that was better pictures. So Joe and Brian rented a professional camera and took pictures of the hosts’ places themselves.”

The Airbnbs

The ‘photographers breakthrough’ was one part of the innovation, another was understanding why the hosts were using Airbnb in the first place.

This didn’t just make the listings better. It also taught them about their hosts. When they came back from their first trip to New York, I asked what they’d noticed about hosts that surprised them, and they said the biggest surprise was how many of the hosts were in the same position they’d been in: they needed this money to pay their rent. This was, remember, the worst recession in decades, and it had hit New York first. It definitely added to the Airbnbs’ sense of mission to feel that people needed them.

The Airbnbs

What kind of runway (ie. guaranteed months of survival) a startup has is contingent on many factors related to investment (who the investors are, location, etc). Some have plenty of cash in the bank, others are on the brink of bankruptcy. The whole theory of ramen profitability can apply to both, even though the practicality between executing a strategy when you are broke vs. flush with cash is obvious. It simply creates a discipline to get to the core of what drives the business model into a position where cashflow trends in a positive direction.

In Airbnb’s case, if you compare these Jan. and Feb. 2009 numbers below with the numbers with Aug. and Sept. 2008, the nominal difference is not huge (~$900 from peak of one period vs. the other), the % difference is massive (~+200%).

In late January 2009, about three weeks into Y Combinator, their efforts started to show results, and their numbers crept upward. But it was hard to say for sure whether it was growth or just random fluctuation. By February it was clear that it was real growth. They made $460 in fees in the first week of February, $897 in the second, and $1428 in the third. That was it: they were airborne.

The Airbnbs

Airbnb was not profitable as a company at this point. They began trending in the right direction, gaining momentum, and by piecing together other elements of the company’s history we know that the professional photographer breakthrough was arguably the main factor responsible for catapulting their growth once they began to scale that innovation in 2010 after they raised their Series A ($7.2M in Nov. 2010).

LumosBusiness – Airbnb Business Model Innovation

Hosts could automatically schedule a professional photographer to come and photograph their space.[4] Though initially only 20 photographers were contracted by Airbnb, the service became an instant hit. [2] Though this initiative wasn’t cheap for the cash-strapped startup, the founders felt that the long-term benefits—enhanced listings resulting from this program are two and half times more likely to be booked, and they earn their hosts an average of $1,025 per month—were well worth the cost. By 2012, that number had grown to more than 2,000 freelance photographers employed by Airbnb to photograph 13,000 listings on six continents.”

Airbnb – Growth Studies

Overall, ‘Ramen Profitability’ is a creative way to help entrepreneur(s) zone in on the target in their early days. Technological and product-led innovations are important, but ‘The Airbnbs’ is an instructive lesson in some of the limitations of traditional startup thinking for both founders and investors alike.

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