Hacker News Reader

Comment by thesausageking | Hacker News Reader

Let me understand this. Gumroad raises $8m from VCs, isn't able to grow fast enough, so the VCs agree to give up any claim on the company. Sahil fires all of the employees, hires a cheap contracting firm and some of the employees back as part-time contractors. The company now does $11m in revenue, most of which is profit and Sahil keeps.

That's amazing. For Sahil. Not so great if you were one of his investors or former employees who had options.

View on HN

You know, I often feel like the success of a business is set at the beginning. There is certain trajectory created by initial starting conditions (founding team, vision, talent, timing), market fit, and external forces and events, and it is very hard to escape that. As CEOs and founders we like to think we have a lot more control than we actually do.

The point of VC is to inject money to achieve hypergrowth. But how much of that growth is achieved because of VC money, and how much because of the "natural trajectory" of the business? Or to ask another way, what portion of the VC money actually affects the trajectory and what portion makes no measurable difference?

This graph shows exactly what I mean. If you only had the "Creator earnings" part of the graph, would you be able to tell where spending was cut?

https://sahillavingia.com/operating.png

I've often felt this way, but this is the first time I see it summarized so succinctly in one image.

Exactly. If you have good growth at the beginning (not hyper), you can afford to bootstrap without any VC at all.

To me, VC money pays for marketing spend, most of which is ineffectual. Be hyper-focused on putting out the best possible product and let it sell itself.

How do you pay engineers? This only makes sense if you have the talent to bootstrap by building everything yourself.

Knowing how to code sure helps bootstrapping! I’m not sure how else I would have been able to get a SaaS to 7 figures bootstrapping.

Maybe the second best path would be a very high paying job (lawyer?) that can afford to pay a developer or two to get the MVP going. But you have the fun risk of “how do you judge the code being made if you don’t code”

> Let me understand this. Gumroad raises $8m from VCs, isn't able to grow fast enough, so the VCs agree to give up any claim on the company. Sahil fires all of the employees

VCs don't simply give up claims to companies that look like the might be profitable. The writing on the wall was that Gumroad wouldn't survive without additional infusions of cash from investors. If they couldn't find any investors willing to put money into the company, it would have gone bankrupt.

In other words, those employees wouldn't have had jobs anyway. Their equity would be worthless while the company went through bankruptcy.

Normally these companies are sent through arduous bankruptcy proceedings, the assets sold, and the investors recoup pennies on the dollar. The VCs could have gone this route and Sahil could have bought the assets at some nominal amount, but the VCs decided that ceremony wasn't worth their time and just gave it to him. Or at least that's how I read this.

It might have been more fair if the VCs had given the company to the employee equity holders as well, but I assume Sahil would have simply bought out their <1-2% holdings for pennies on the dollar.

If this negatively affects any former employees that's terrible but are we supposed to feel bad for VCs? There have been other stories like this where the HN response is "Won't somebody think of the VCs!" and I just can't do it. They're adults and business people, they'll live.

Their revenue is a bit misleading since most of it goes to CC processing fees. This tweet says net profit was 214k in 2019:

https://twitter.com/shl/status/1215673023472140289

Probably triple that this year with the Covid bounce. So obviously doing well for himself, but not quite as good as you think.

From the Tweet, from Sahil (CEO) himself:

  Gumroad, Inc in 2019:
  Revenue: $5M (up 46% YOY)
  Gross profit: $1.7M (up 68% YOY)
  Net profit: $214K

I not familiar enough with the Gumroad model to understand why how the creators made $73M in 2019, but Gumroad revenue was only $5M.

Gumroad likely only takes a small cut on each transaction (so about 6% in this case?).

> "I not familiar enough with the Gumroad model to understand why how the creators made $73M in 2019, but Gumroad revenue was only $5M."

I would imagine that monies collected on behalf of someone else for transmission to them do not count as revenue since they do not at any point belong to the business. Banks do not claim deposits or incoming checks as revenue, for example.

Sounds like it's a market place, so that's the money the sellers(creators) received.

It is the difference between gross and net revenue. It is why bookmakers don't report all the bets they take in as revenue. Banks that trade securities don't recognise the money from securities they sell as revenue. Roughly, you only recognise revenue on the part of the transaction that economically accrues to you. If you are just a middleman, you only recognise your commission (this is, however, very complex...for example, some companies that trade in commodities recognise product sold on the top-line because they take ownership of the cargo...so it varies...the accounting in this case is what I would want to know as someone using the financial statements).

The graph speaks for itself: https://sahillavingia.com/operating.png

You seem a little surprised. But why? This is the whole point of business: to make more money than you lose.

As for why he did it, it looks like he wrote a retrospective here: https://sahillavingia.com/reflecting

Why leave the creators out? If this was the plan all along then sure maybe Sahil is evil. But the other way of seeing this is that he found ways to keep the product alive and it worked incredibly well (at least according to that post). If that’s the case that’s great for the users of the product no?

I think it’s $11M for the creators that’s going through gumroad. It’s not profit.

Above the fold in the article is "our creators earn over $175 million a year, and we generate $11 million in annualized revenue"

I take that to mean Gumroad's revenue (not gross services sales) is $11M/yr.

Reply on news.ycombinator.com