Gumroad Launches Equity Crowdfunding - Invest in Creators

Gumroad Secures $6 Million Funding with Unique Investor Opportunity

Gumroad, a company dedicated to empowering creators through direct sales of their work, has announced a $6 million funding round, establishing a valuation of $100 million. A portion, $1 million, is allocated to AngelList’s Naval Ravikant and Basecamp’s Jason Fried. However, the remaining $5 million is being raised through an innovative approach.

Equity Crowdfunding Enabled by New SEC Regulations

The company, founded by Sahil Lavingia, is leveraging a recently enacted SEC regulation. This new rule significantly increases the permissible amount of capital that can be raised through equity crowdfunding campaigns. The limit has been raised to $5 million annually, a substantial increase from the previous $1.07 million.

Lavingia believes this regulatory change has the potential to reshape capital acquisition for both startups and venture capitalists. It opens the door for a broader base of investors, including users, friends, and those previously considered unaccredited, to participate as limited partners.

“Should this strategy prove successful, startup founders will find themselves with increased opportunities to pursue direct funding routes,” Lavingia stated.

Alternative Funding Methods Gain Popularity

While venture capital remains a dominant force, alternative fundraising methods are gaining traction. These options allow founders to retain greater ownership control and access capital on more favorable terms.

Since its inception in 2011, Gumroad has already secured over $8 million in funding from prominent investors. These include Kleiner Perkins, First Round, Max Levchin, and SV Angel, among others. However, this current round signifies a strategic shift in Gumroad’s long-term capital-raising strategy.

The company intends to continue utilizing crowdfunding annually until a potential public offering is realized.

Crowdfunding Platforms Poised for Growth

With the increased $5 million annual limit, crowdfunding platforms such as WeFunder, StartEngine, SeedInvest, and Republic – the platform Gumroad is currently utilizing – are better positioned to disrupt traditional fundraising practices.

Current Crowdfunding Progress

To date, Gumroad has successfully raised $3.4 million towards its $5 million goal, with commitments from 3,458 investors. This diverse group includes creators who actively use the Gumroad platform, followers from Lavingia’s Twitter account, YouTubers, and notable figures like Figma founder Dylan Field, as well as partners from various venture capital firms.

To encourage broad participation, Gumroad initially capped individual investments at $1,000.

Equity and Future Conversion

As part of this financing, Gumroad is offering 6% of its ownership. However, investors will not receive their equity stakes immediately. These stakes will be realized upon the conversion of the SAFE (Simple Agreement for Future Equity) note, a process that could take up to a year.

The conversion could occur through an Initial Public Offering (IPO), an acquisition, or a $10 million priced funding round. Lavingia anticipates a priced round occurring next year via a Reg A offering, which has an annual limit of $75 million.

Financial Performance and Valuation

The SAFE note’s valuation cap is set at 3.5 times Gumroad’s current revenue. In 2020, the company generated $9.2 million in net revenue, representing an 87% increase year-over-year. Net profit also saw substantial growth, rising 286% to $1.08 million.

Shifting Landscape of Crowdfunding

Recent increases to the crowdfunding investment limit have sparked debate among institutional investors. A primary concern centers on the administrative complexities of managing equity distribution to a large number of individuals for relatively modest investments. Furthermore, some investors emphasize the value of specialized expertise, suggesting that the insights of seasoned professionals may surpass those of numerous smaller investors.

Despite these reservations, the recent capital raise by Gumroad exemplifies two prominent trends championed by its founder, Sahil Lavingia: transparent operations and the broadening access to venture capital. Lavingia regularly broadcasts Gumroad’s board meetings via platforms like Clubhouse and Zoom, and openly shares key business metrics – including revenue and profitability – data typically kept confidential by private companies.

It’s worth noting that Lavingia was an early adopter of AngelList’s rolling fund model, leveraging SEC Regulation 506(c) to publicly solicit investments on a continuous basis. This approach initially faced resistance, as venture capital fundraising traditionally occurred behind closed doors.

Lavingia anticipates further disruption, stating that the current move will challenge the established venture capital industry, as he discussed with Naval Ravikant of AngelList. He predicts a significant shift in how companies access funding.

A potential challenge lies in the “Testing the Waters” provision under Regulations CF and A+. This allows startups to gauge investor interest before formally offering securities. However, Lavingia cautions that expressed commitments do not guarantee actual capital. A startup might secure $1 million in pledges but ultimately raise only $100,000, creating a precarious situation for founders.

To mitigate this risk, Lavingia advocates for radical transparency and upfront disclosure of potential drawbacks, aligning with Gumroad’s core principles.

“I openly communicated that I am the sole employee working on Gumroad,” he explained. “My intention is to deter investors who might find this arrangement unconventional.”

Arlan Hamilton, founder of Backstage Capital, has also utilized Republic to crowdfund her firm’s operational expenses. Hamilton achieved a milestone earlier this month by raising $1 million in just eight hours, and has since secured an additional $2.4 million under the new investment cap.

During TC Sessions: Justice, Hamilton expressed her belief that a new asset class will emerge, characterizing the existing venture capital system as “broken” and “outdated.”

“Backstage Capital is evolving, and we’ve already begun to adapt,” she stated. “Our recent Republic raise demonstrated the potential of directly engaging the crowd as a fund.”

“The initial steps are rarely taken by ordinary individuals,” Lavingia observed. “It’s typically someone with a unique perspective who leads the way, and the practice gradually becomes more widespread.”

The fact that a founder who also invests in startups is using crowdfunding for his own company presents a complex scenario. However, Lavingia views this as an opportunity to popularize crowdfunding and establish it as a compelling investment option.

In the long run, public crowdfunding rounds could represent a modest portion of a startup’s overall pre-exit financing, but could significantly empower a large number of individuals to become startup equity holders.

“My goal is to emulate Chamath Palihapitiya,” he said, referencing the billionaire founder of Social Capital known for popularizing SPACs. “I aim to build a strong brand associated with private equity and startup investing, and cultivate a large network of individuals I can leverage in various ways.”

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