How Gumroad Reached $152K Monthly Gross Profit and 3,800 Paying Creators in 2019 (Interview with Founder Sahil Lavingia)

Introduction and Sahil's Background

Nathan Latka

00:00Hello, everyone. My guest today is Sahil Lavengia. He is the founder and CEO of Gumroad, a service that helps creators get paid for their work. They sent over $200,000,000 to creators. Before starting Gumroad, was the second employee of Pinterest. Alright. Sahil, you ready to take us to the top?

Sahil Lavingia

00:13>> Yes, let's do

Nathan Latka

00:14it. So talk to you real first. You've been very public online about kind of the ups and downs of Gumroad, and we'll get into that in a second. But first, I was recently on many of the cable networks defending Lambda School as I think the future of higher education. I also then, through some research, realized you guys basically switched spots, you and Austin. You know, he was in San Fran, or San Francisco, went to, or Utah

00:34went to San Francisco, you were in San Francisco, went to Utah. He sold his first book on Gumroad and then built a VC backed company Lambda School. You did the opposite, which is Casey asked to be bought out by a dollar. You got all your kind of equity back. I guess my first question is, has allowed you to, from a financial perspective, kind of breadth all the ups and downs you've taken? Did you get a bit

00:56of a cash payout from Pinterest that allowed you to like smooth out this ride, or were you truly really stressed about food on the table?

Sahil Lavingia

01:03>> I wish. I left Pinterest a few months before my clip, so I I had a that was a sort of financial decision that I should not have made. But no, basically had nothing.

Leaving Pinterest Before the Cliff

Nathan Latka

01:14So you left before the one year cliff, not the four year full vest?

Sahil Lavingia

01:17>> Yeah, the one year cliff. Yeah, exactly. So yeah, I mean, when, you know, Gumroad hit rock bottom, think I the amount of, probably the amount of money in the bank account on my end and on Gumroad's end was, you know, less than, you know, dollars 100,000 or something like that.

Nathan Latka

01:32Yeah. So let's kind of talk about the story. So you launched the company in what year?

Gumroad's Launch in 2011

Sahil Lavingia

01:37>> In 2011.

Nathan Latka

01:39Okay, 2011. And then you do something which you kind of casually mentioned in your medium article where you kind of give the history of the company, which was you got 52,000 essentially views very quickly after you built the product over a weekend via a hacker news post. Was that truly just an accident, or did you do anything strategically with the hacker news post? Did you seed it to like make sure it took off?

Sahil Lavingia

02:01>> Yeah, I mean, tried to seed it. So, you know, a few months before that, I had moved to Silicon Valley. And so every weekend I was working, you know, at Pinterest Monday through Friday, then every weekend I would just network with people I'd met from Hacker News. So I built sort of a group of people that I, you know, knew. And so, you know, something that basically everybody does in the Valley is when you put something

Hacker News Strategy and Early Traffic

Sahil Lavingia

02:22>> on our hacking news, you sort of ping all your friends. Right? And you're like, hey, I just submitted this thing. Could you upvote it? And every everyone does that or should be doing that because that's how you get to the top of the homepage. And then, you know, at at after that point, it's up to the sort of the free market to decide if what you're doing is interesting enough. But to get the first four or

02:41>> five, ten people to upvote it, yeah, totally manual process, it's something I still do today. I mean, when I wrote that post that sort of dictates the history of Gumroad, you know, I had a friend who was a Y Combinator founder submitted to Hacker News, and then I pinged a bunch of people to upvote. And it did, it got like 2,000 upvotes. So I think it would have probably done okay without that initial boost, but sort

03:03>> of just to secure the chances of that happening, you know? It just makes sense to spend five, ten minutes- Seating. Seating. Seating, yeah.

Nathan Latka

03:11That makes sense. Yeah, that first post back on 04/04/2011, the title on Hacker News was My Weekend Project, Gumroad, and that was basically it. You got three ninety six kind of upvotes, two zero two comments. Did that drive the majority of the 52,000 views back to the website that week?

Sahil Lavingia

03:24>> Yeah. I mean, was probably 90 plus percent of the traffic was from Hacker News.

Nathan Latka

03:29Interesting. And then long tail today, when you look at your Google Analytics, what does Hacker News drive pretty consistently on a daily basis when you're not launching a new article on it?

Sahil Lavingia

03:37>> I mean, almost nothing.

Nathan Latka

03:38Oh, really? So there was no flat line. It it went right down to zero, spike in zero?

Sahil Lavingia

03:42>> Yeah. To and pretty quickly too. I mean, know, probably a month in, it was probably driving, you know, maybe a few 100 people a day. So it drops you know, things get cycled fast. Right? So there's always a new hot, sexy, shiny new object that people wanna talk about.

Growth to 2014 and Fundraising

Nathan Latka

03:58Yep. So you launched 2011, you build the company up to let's take us up to 2014 before kind of the changes happened. So what was kind of what were your kind of key metrics going up to that point? What were you focused on? And how much had you raised?

Sahil Lavingia

04:12>> Yeah, so we'd raised, at that point, $8,000,000, dollars 8,000,000 from Kleiner Perkins led the Series A, Max Levchin, Naval Ravikant, a bunch of sort of Silicon Valley Angels and VCs. We had grown the team to 25 people at our peak, including interns. And we were processing around 2,500,000 a month for creators, growing roughly eighty eighty to 100% year over year.

Nathan Latka

04:39Yeah. In terms of GMV kind of through the platform.

Sahil Lavingia

04:41>> Yeah. Exactly.

Nathan Latka

04:42And then your revenue model, how do you make money?

Sahil Lavingia

04:44>> So we take before the layoffs, we actually transitioned to a new model. But before the layoffs, we basically took a flat 5%. Okay. So, yeah, that that was so roughly I mean, end up with credit card processing fees, etcetera, around 7%. So if we were processing two and a half, we were making around, you know, a little over a $100,000 a

Revenue Model and Burn Rate

Sahil Lavingia

05:04>> month. Yeah.

Nathan Latka

05:05You'd be 7% would be $1.75. And then if you keep in 5%, it's like $1.25 or something like that a month.

Sahil Lavingia

05:10>> Burning a ton.

Nathan Latka

05:11You put your expenses all in the article.

Sahil Lavingia

05:14>> Yeah. And you were burning, I think, net burn, like negative $390 or something, on those months.

Nathan Latka

05:19Right?

Sahil Lavingia

05:20>> Yeah, dollars 351,000 a month. Okay. So our highest month.

Nathan Latka

05:24So what happened? Here's what surprised me about what you put out online in terms of your storyline. You kind of put this to your team when you still had what many would believe is a long runway left eighteen months, Most people wait until like four or like one month and they're like, we don't have payroll tomorrow. Why did you, what gave you the instinct at eighteen months to basically say, hey team, we're in trouble, go all

05:48in or leave the company now for security. Everyone obviously stayed and hustled, but why eighteen months?

Deciding to Tell the Team at 18 Months Runway

Sahil Lavingia

05:53>> Yeah, I mean, I think people say, you know, the sort of the traditional timeframe in Silicon Valley is when you have eighteen months left to runway, you need to go start raising money. And to do that, I just could not I honestly, I still don't really understand how founders, and I have plenty of founder friends that say raise money in private. Like, don't tell the team. Because if things don't go well, you don't want them to

06:13>> start freaking out. And I just don't I just don't know how to do that, honestly, because I don't understand how you can be out of the office for such a long period of time. Raising money is not an easy thing to do. It requires a lot of in person meetings and follow ups. So I I don't think, for me, was I don't think I could could have done it strategically in any other way, where I had

06:36>> to tell the team, I had to sort of get everybody on the same page on where we're at as a company because it would be such a difference from how we communicated within the company on on every other thing that we did.

The 2014 Layoffs and Transition to Profitability

Nathan Latka

06:49Yep. So 2014, you end up laying off 75% of your workforce down to, call it, four or five people. And then, you know, a year later, you end up basically flipping the company to burning $350,000 in cash to essentially like $1.20 ish top line all the way down to the point where you were essentially cash flow positive to about $10 a month. What was the hardest part of that transition? It or or actually the most unexpected

07:15part? Letting the team go is obviously hard, but what was the most unexpected part?

Sahil Lavingia

07:18>> Yeah. I mean, I think that the what you really sort of come face to face with is this thing that you've built valuable to people. Because so much of a venture backed company is is spending money to grow, right? And so when that goes away, when you're when you have some software product out in the world, you're doing no sales, no marketing, no advertising, I have really, frankly, very little support even to sustain the product. It

07:43>> was just me, you know, once a week going through our support backlog and fixing bugs and fighting fires when they came up. You just look at the numbers, and you're like, this is the value of this thing. Like, if it's gonna grow, it's because people are using it, finding value in it, telling their friends, etcetera. And it did. I mean, it definitely was not growing nearly as fast as it was prior. We were doubling every year.

08:07>> That year after the layoffs, we basically grew five to 10%. But then the year after that, 15%. The year after that, 25%. And this year so far, we're up over 40% year over year. And so I think really what I saw, I think, was a return to normalcy, and to like, if we had never raised money, this is roughly how we would have grown, A very sort of slow compound compounded growth rate, certainly nothing to complain

08:34>> about with 40 year over year, but that's eight years into building this SaaS product.

Nathan Latka

08:40Most people do not have the luxury of an investor sending them, I imagine, a cold email right after the partner who led the round leaves saying, want to buy you out for a dollar. Now, founders can actually engineer this if they understand how VC firms think by helping them essentially giving them losses, which helps them with their LP base. Right? So so tell that story in terms of if founders want to intentionally make that happen and

Buying Out Investors for a Dollar

Nathan Latka

09:02convince their VCs to essentially take their position out for like a dollar.

Sahil Lavingia

09:07>> Exactly. Yeah. So so basically, to take a loss is to you know, you have a fund, you have a bunch of different investments. And at the end of the year, let's say you've made $100,000,000 you have all of these investments that are technically still going, right? They could be wins, they could be losses. And so you can basically go to a venture fund that has had a really great year and say, hey, look, like, we're we're

09:31>> basically dead. You know, we might return you 30% of your investment three or four years from now, Or you can you can just write off this investment today, put it on your on your on your on your on your taxes as a loss, and then also clean up the books. You don't have to think about it ever again.

Nathan Latka

09:49No board seat, no Dino insurance, no risk. Yeah.

Sahil Lavingia

09:52>> Exactly. Yeah. You can save money in a lot of these different facets. And I think that was the other thing about Kleiner specifically, is they were going through an internal reorg. And so it was a way for them to sort of just, I think, clean house in general. And so if you can really know where your VCs are in terms of when they invest in your company, is it getting close to the end of the fund,

10:11>> are they having a great year or not, are they having internal drama that they're going through? And just know, you know, it's just like knowing your customer, Right? If if if you have a relationship with somebody

10:24>> and you can give them an out, I think they might they might take it.

Nathan Latka

10:27So how much did Kleiner put in of the 8,000,000?

Sahil Lavingia

10:30>> They put in 7.

Nathan Latka

10:31So they put in 7. So for them, it's essentially it's a $7,000,000 write off on, you know, the hundreds of millions they potentially earn that year. Right? It juices their IRR for their LPs a little bit. You then, though, I imagine there was what was liquidation preference on on the term sheet? One or two x?

Sahil Lavingia

10:46>> So on the so so with Kleiner, actually, raised nine total because we did this seven, which was at a one x. And then and then we raised another $2,000,000 bridge round, and that was at a four x.

Nathan Latka

11:00Jesus. Holy crap. Okay. So basically, when you look at what you'd have to sell for just to get past the investors before the waterfall hits the common holders or early employees, you're having to sell for at least $16,000,000, four times two plus seven.

Sahil Lavingia

11:16>> Exactly. Yeah. And then there were a little there was a little bit more money in the bridge, it ended up being around, yeah, $17,500,000 or something like that.

Nathan Latka

11:24So once Kleiner is out, those liquidation preferences disappear. And now you could sell the company at what, 2 or 3,000,000 and have a pretty darn good outcome for most people.

Sahil Lavingia

11:34>> Correct. Yeah. I think our preferences at this point we've we've also bought back a few other folks. And so now our preferences are a little under 2,000,000. So, yeah, we could sell the company for 2.5 and, you know, I could make a million bucks

Nathan Latka

11:45or something. So how much of the original 9 in the company is is still in investors who didn't sell?

Sahil Lavingia

11:50>> It's around $1,900,000.

Nathan Latka

11:53Okay. About about 2 ish million. Okay.

Sahil Lavingia

11:55>> So it's mostly the seed investors that were, you know, the the 1.1 and then around $800,000 worth of pro rata that they put into the into the series A.

Nathan Latka

12:03800 pro rata to keep their percentages. They're right. It kinda central ratchet clause. Yeah. Yeah.

Sahil Lavingia

12:07>> Yeah. Exactly.

Nathan Latka

12:08Okay. Interesting. So you do that. All through this time, how are you generating revenue for yourself? I mean, Austin said you invested in Lambda School, so you had some play money. How'd you build wealth while your company was essentially struggling?

Current Business Model and Premium Tier

Sahil Lavingia

12:22>> Yeah, I mean, I honestly wish I would have done it differently. I wish I would have done things like investing in companies like Lambda School a lot more. But I basically paid myself, at the beginning of the company, I paid myself $60,000 a year, which in San Francisco was basically making no money. And then I increased my salary. Basically, the way I thought about it was my salary is going be the salary of the lowest person

12:43>> in the company. So at some point, was $95,000 a year, and now it's $120,000 a year. So it's basically moving to Provo, making $120,000 a year gives me a little bit of runway. And then the other thing that is is the reason I was able to invest in Lambda is is that I I invested in a company called HelloSign that ended up selling to Dropbox for 230, and, I made around a 16 or 17 x Right?

13:07>> On Yeah. Joseph Walla. Awesome guy.

Nathan Latka

13:12What was your return on that? Sorry.

Sahil Lavingia

13:13>> It was around 17 x.

Nathan Latka

13:15Okay. That's pretty good.

Sahil Lavingia

13:16>> So, so that gave me I mean, honestly, that that single investment was, you know, has given me more cash in the bank than Gumroad

Nathan Latka

13:24to date. That's interesting. So fast forward now to today, you change first off, how did you change your business model? How do you make money now today after the 2014 pivot?

Sahil Lavingia

13:34>> So what we did is we added a premium tier where you can either we sort of forked our 5%, and we said you can either pay us $10 a month or more, and the the transaction fee is gonna be 3 and a half, which is closer to what you pay a credit card company, or it's still the same model, but you pay eight and a half percent. And then there's no there's no fixed fee. And the

13:52>> the reason we did that was basically we were having these incredibly spiky months where when, you know, when you're taking 5%, if your creator's having a phenomenal month, someone launches a product and makes $2,000,000, it's great for you, but often that doesn't happen. You're super seasonal, etcetera. And we needed to make sure that when we were, you know, sort of post layoffs that we had a base of revenue every single month regardless of that. And so

14:13>> that's why we launched the the premium SaaS offering.

Creator Metrics and Discovery Features

Nathan Latka

14:16Yep. Okay. So if you look at last month, how many creators are paying you $10 a month?

Sahil Lavingia

14:21>> Around 3,800.

Nathan Latka

14:22Okay. 3,800. So there's essentially $38,000 right there and kind of pure SaaS revenue and add back on then on top of that. So if I guess maybe the right question is how much transaction volume did you process last month?

Sahil Lavingia

14:37>> Yeah. So last month, we processed a little under $6,000,000.

Nathan Latka

14:41Okay. And when you look at the weighted average between the 3.5 up to the 8%, what was the effective weighted average that you took on the 6,000,000?

Sahil Lavingia

14:49>> It was around the math. I can do the math right

Nathan Latka

14:53now. Yeah. Take your time.

Sahil Lavingia

14:57>> It was a 7%.

Nathan Latka

14:58Okay. So basically on the 6,000,000 processed, you took essentially $420,000 out of that. Now you have credit card processing fees and things like that. So what was total recurring revenue last month, transaction and flat fees?

Sahil Lavingia

15:12>> It was 150,000 in gross profit.

Nathan Latka

15:14150. Okay. So again, 38 of that is a flat $10 fee. The rest called $110 is really coming from that 7% on the 6,000,000.

Sahil Lavingia

15:21>> Exactly.

Nathan Latka

15:22Is this the right model? Are you gonna change again in the next month, or you feel like this is the right one?

Sahil Lavingia

15:28>> I think it's the right one for now mostly because it works, well enough. And and and revisiting pricing is always a little bit scary, and you you have no idea who you're gonna piss off. But almost definitely at some point, we will revisit it. And mostly to simplify it, I think people get confused. I have to explain the three and a half, the eight and a half. And so if we can simplify that, we will.

Nathan Latka

15:49Yep. So just to round out your numbers, you're so transparent on Twitter. I encourage everyone you go follow us, Sahil. It's at s h l. But in 2019, he put up volume process 5,800,000, revenue 404 k, gross profit a $152,000. More importantly, again, your mission, it sounds like, is really for creators. So I'll let you share these numbers. Right? How many creators made over $10?

Sahil Lavingia

16:10>> Yeah. 81 creators made over $10,000, seven eighty nine creators made over a thousand bucks, and then a little under 10,000 creators made something. It made at least $1.

Nathan Latka

16:21I I love that. So you have since you have 3,800 paying that FATFI of 10, some portion of them are essentially not active. What kinds of things are you building? Put put on your UX hat for a second. What kinds of are you are you building into the product, lifecycle emails, etcetera, to get those kind of dormant paying customers reactivated so they can start making money doing their passion or their hobbies?

Sahil Lavingia

16:39>> Yeah. So I think one of the big things that we realized is we were so launch heavy, and that's great for the people that make over $10,000 a month. They're really thinking about this like a business, but there are a lot of sort of hobbyists, I guess, that sign up to Gumroad, and then they launch a product, and then they just never do anything again. They don't think about things like life cycle emails, etcetera. And one

16:57>> of the interesting things about Gumroad is everything we do kind of mirrors what we want creators to do too. So if we're doing life cycle emails, we should probably be training our creators to do life cycle emails for their own customers. And so that's kind of a nice meta thing that happens. But basically, what we realize is there's a big opportunity in terms of discovery, where if you put your stuff on Gummer at once, people, what

17:16>> they want is they want AdSense. They want to create a website, and then basically for the rest of their life, they get some money. It doesn't really matter how large or small it is, because if they get some money in the bank, they're happy. They don't have to do anything for that. And so that's that's one of the big investments that we've started to make this year. We've doubled already from a $100,000 a month in discovery,

17:36>> new volume to creators, to $200,000 a month, and we we hope to get to a million in the next couple years a month. And then we take a higher transaction fee of that.

Nathan Latka

17:44We take a Are you at 6,000,000 already monthly?

Sahil Lavingia

17:48>> Yeah. So that that's $200,000 a month of of GMV, extra extra margin extra volume.

Sahil's Personal Finances and Salary

Nathan Latka

17:54Sorry. I thought you I thought you're already processing about 6,000,000 a month. Isn't that all going to creators?

Sahil Lavingia

17:59>> Yes. Yeah. It is. So this is just from that one feature of discovery, like recommendation. Got it. Yeah. So it's an extra three three to 4% of new volume. Got it. That's coming from this new set of features.

Nathan Latka

18:11It's essentially a marketplace. It's like your own Exactly,

Sahil Lavingia

18:15>> it's our own Etsy. And the hope there is that long term, you can put your stuff on Gumroad and continuously make long tail revenue for the rest of your life, we can continue to build demand on the consumer side, which is something we've never done before. We've always been a tool for creators to monetize their existing audience. But we think there's a big opportunity in, hey. You made a $100,000. If we can give you an extra

18:39>> $5,000, an extra $10,000 because of recommendations, because of emails that we automate for you, because of cross selling, etcetera, we think that can be a pretty great opportunity.

Nathan Latka

18:49It sounds like you and you and Nathan Barry need to get together and merge or something. You guys talk the exact same way.

Sahil Lavingia

18:55>> Oh yeah, do we? That's good.

Nathan Latka

18:57Yeah, you connected with

Famous Five: Books, Tools, and Habits

Sahil Lavingia

18:58>> him? Yeah. He was of our first really big success stories actually.

Nathan Latka

19:04Well, he's like Austin. I mean, he launched his whole business. He launched ConvertKit off selling eBooks.

Sahil Lavingia

19:09>> Exactly.

Nathan Latka

19:10Well, business model should have been take 2% of every business I'm off man.

19:15Alright.

Sahil Lavingia

19:16>> 0% transaction fee if we get 5% of your total.

Nathan Latka

19:18There you go. Alright. So let's wrap up with the famous five. Number one, what's your favorite business book?

Sahil Lavingia

19:23>> I really love thinking fast and slow.

19:26>> Yep.

Nathan Latka

19:27Number two, is there a CEO you're following or studying?

Sahil Lavingia

19:29>> Austin from Lambda is amazing. I think the way that he thinks about social media and Twitter to sort of build a business, almost single handedly, it feels like, is pretty pretty stellar.

Nathan Latka

19:38Number three, what's your favorite online tool for building your company?

Sahil Lavingia

19:42>> I've really been investing in Notion. That's been where we've been moving all of our product management, all our Wikis, all our roadmap stuff is all Notion now.

Nathan Latka

19:50Number four, how many hours of sleep do you get every night?

Sahil Lavingia

19:53>> Seven and a half. And that's the thing I will never, never Compromise. Never change. Yeah. Never compromise.

Nathan Latka

20:00And what's your situation? Married, single, kids?

Sahil Lavingia

20:02>> I have a fiance. We're getting married in December.

Nathan Latka

20:05Oh, exciting. Okay, so no kids?

Sahil Lavingia

20:07>> No kids.

Nathan Latka

20:08And how old are you?

Sahil Lavingia

20:09>> I'm 26.

Nathan Latka

20:1026 today. Great. Take us back to your 20 year old self. What do wish you knew?

Sahil Lavingia

20:14>> Honestly, I think I wish I just focused on, I think I did the right things, honestly. I just think I've spent so much time second guessing myself, and I wish I had just been more committed to the vision instead of constantly you know, being like, am I doing the right thing? It turns out, I think if care about what you're building and the customer base that you're building for, like, you're probably good. You're probably not embezzling

20:40>> money on the side.

Nathan Latka

20:41Guys, gumroad.com has paid over $200,000,000 out creators and launched many big brands we know today like Lambda School and ConvertKit, but it was all very shaky in 2014 when their net burn was over $300,000 per month. Had to lay off essentially 75% of his staff down back on to four or five people, bought out investors. Now today, the company is growing nicely, processing $6,000,000 in revenue all to creators every single month, and they essentially take anywhere

Advice to His 20-Year-Old Self

Nathan Latka

21:05between 38% on that. Then some folks, about 3,800 creators, pay a flat fee on addition to, call it, 3.5%, about 10 per month. So gross revenue today, about a $152,000 per month as he looks to continue to scale. Sahil, thank you for taking us to the top.

Sahil Lavingia

21:18>> You're very welcome. Thanks for having me.