Inside Gumroad’s Historic Crowdfunding — And Sahil Lavingia’s Plans To Turn Customers Into Investors

Just before launching the crowdfunding campaign for his startup, Gumroad, Sahil Lavingia fretted. Despite two of tech’s big names, AngelList founder Naval Ravikant and Basecamp CEO Jason Fried, committed to invest a combined $1 million into Gumroad, other investors warned Lavingia against becoming a sacrificial lamb as the first entrepreneur to test the SEC’s new rules expanding the crowdfunding limit for a startup from $1 million to $5 million.

Lavingia’s no unknown himself, with 181,000 followers on Twitter and another 255,000 on the live audio app Clubhouse. But even he wasn’t sure how much demand there would be for tiny stakes in his company, whose valuation he was setting at $100 million – $100 stakes at the minimum, $1,000 at the max. “If we didn’t get close, if we had to remove it, the narrative and the momentum would have been a little bit in jeopardy,” Lavingia says.

Instead, Gumroad closed its round in 12 hours. Speaking to Forbes about the results – details of which were first published in the Midas Touch newsletter on Sunday – Lavingia drilled into the results of the experiment, which attracted 7,303 investors and a waitlist of more than 1,000 more – as well as why you may hear his next such experiment happening in a Clubhouse room soon.

The results

After the question of whether enough people would bother to pay for small stakes in Gumroad, a company which offers software tools for creators to sell directly to customers, the next was how much they’d want to buy in. Gumroad’s backers invested an of $679, with 48% investing the maximum amount, and 18% the minimum. A mix of entrepreneurs and investors – many of them active on Clubhouse and Twitter themselves, or acquaintances of Lavingia’s, wrote similar $1,000 checks to the rest, including Lambda School’s Austen Allred, Figma’s Dylan Field, Winnie’s Sara Mauskopf, and investors like Seven Seven Six’s Alexis Ohanian, Hustle Fund’s Elizabeth Yin and Arlan Hamilton, whose Backstage Capital also recently sold out its $5 million raise on the same provider as Gumroad did, Republic.

Nearly three-quarters of Gumroad participants were based in the U.S., according to Republic’s data, with India next; nearly half were aged 25 to 34. And participants were most likely to have estimated income of $100,000 to $150,000 or more than $200,000, with the next most active bracket $150,000 to $200,000, the cutoff to be an accredited investor.

For the vast majority of unaccredited investors, it was their first investment on Republic. Nearly 2,300 of participants were creators on the Gumroad platform.

One shortcoming of the open raise that Lavingia addressed head on: the gender ratio of investors in Gumroad identified as overwhelmingly male at nearly 91%. Raising a public crowdfunding round requires it be fully open to anyone, he says; in the future, Lavingia would encourage others to seed interest in certain communities and communicate the opportunity proactively to affinity groups. “Going forward, there’s a lot of stuff here that we can do better,” he says.

The SEC rule change also comes in a moment when meme stocks, NFTs and SPACs have offered consumers a wide variety of new investment options, not necessarily with their best interests at heart. Lavingia says Gumroad could have likely met demand at a far higher valuation than he believes it deserved. But he insists that registering and listing a company on a service like Republic would be an unwieldy, low-upside way to pump and dump an asset, especially as Gumroad can’t raise using crowdfunding again for one year, and the shares in the company are essentially illiquid up to that point. “There are better ways to scam people,” he says.

Raising on Republic and its ilk is expensive, too, at least for now. Add up Republic’s cut, legal fees and other costs, and Gumroad’s paying back more than $200,000 of the $6 million total it raised. Lavingia’s fine with that – he sees it as the equivalent of a marketing campaign – but his hope is that the costs to list a project drop considerably over time.

A new model

In the near future – as soon as April – expect to hear Lavingia and one or two other investors interviewing an entrepreneur such as Allred or Helena Price Hambrecht at aperitif startup Haus as part of the next phase of his crowd-funding ambitions. While he can’t crowdfund for a while through Gumroad, there’s Lavingia’s rolling fund through AngelList, which invests about $10 million per year; Lavingia hopes to use that fund to help another company raising their own crowdfunding round. He doesn’t expect the model to be popular with VC firms conscious about their allocation in a position, but hopes that several “solo capitalists” like Josh Buckley or Elad Gil would join in anchoring such a raise.

The hardest person to convince, Lavingia says, will likely be an entrepreneur leery of a big, messy cap table, or the same potential for embarrassment that he recently endured. His pitch: “blur the line between investor and customer,” creating super fans or spokespeople for a company who will be more likely to support it and hype it in the future, much like how Bitcoin or Tesla stakes create diehard super-fans. For Gumroad, that’s the two-thousand-plus creators who bought its equity – Lavingia hopes they’ll be more loyal in the years to come.

“You put a tiny amount in Bitcoin, and it’s sometimes pretty stupid, because then you spend an hour thinking about it per day. The ratio doesn’t make any sense,” Lavingia says. “Imagine if Robinhood had their crazy event post-IPO,” Lavingia says. “My guess is they would have had a lot more people who were going to defend them, do more diligence, try to develop much more of a well-rounded perspective than just dunking on [CEO] Vlad [Tenev].”

Much of the sustainability of the model depends on the platforms like Republic, where CEO Kendrick Nguyen says he’s battling a misconception that vetted, legitimate startups are innately riskier than public equities, let alone a call option on a meme stock. Republic only accepts about 2% of projects submitted to the platform, Nguyen says; the company’s also investing in education tools to help users back projects responsibly.

For his part, Lavingia says he’s confident that most people writing a $100 check to a startup they feel affinity for aren’t expecting to get rich from it. “For most people, it wasn’t like, I’m doing this to make a bunch of money. That’s not really going to happen for most people anyway, unless some crazy event happens,” Lavingia says of Gumroad’s raise. “I think people are excited to even get an opportunity to do this. People can’t generally get access to these deals.”

Still, he encourages the new wave of unaccredited investors to follow basic strategies, like investing in a portfolio of five or more companies over a period of a few years, and investing with uniform amounts – a lesson he says he learned from a blog post by Matrix Partners’ Ilya Sukhar. “Don’t put all of your eggs in one basket, even if it’s going to be tempting to do that,” Lavingia says.

As for an entrepreneur biting – it may not take long. Lavingia says he’s spoken recently to Patrick Collison at Stripe, who, while Stripe is too far along with its new $95 billion valuation, expressed support for the community-building idea. He name-checks another company, work collaboration startup Front, as having partially blazed the trail when CEO Mathilde Collin raised $59 million from an investor group of largely other software CEOs last year.

Lavingia and Collin hadn’t spoken as of last week, but when asked about the crowdfunding tactic, Collin told Forbes it was a “brilliant idea.” She’d recently visited a local ice cream shop in her neighborhood of San Francisco that was offering customers a chance to help sustain its operations by participating in its debt, a move that struck Collin as clever: she’d be much more likely to frequent a store in whose success she’d played a small part.

If Lavingia’s tactic had been available last January, when Collin raised her round, she’d have been all ears. “Feeling part of the journey makes people in the community super happy,” she says. “I would have done this for sure.”