Gumroad wants to make equity crowdfunding mainstream

Gumroad, a startup that helps creators sell their work, is raising $6 million at a $100 million valuation. While $1 million of that total is reserved for AngelList co-founder Naval Ravikant and Basecamp founder Jason Fried, the remaining $5 million is being raised with a twist: anyone willing to fork over at least $100 bucks can invest in the round.

Founded by Sahil Lavingia, Gumroad is using a new SEC regulation, passed today, that increases the maximum amount of money that can be raised in an equity crowdfunding campaign. Now, investors and founders can raise up to $5 million per year from crowdfunding, up from $1.07 million the year prior.

The increase might not turn heads in a world of $90+ billion valuations, but Lavingia thinks the new rules could revitalize a path to raising capital for venture capitalists and founders alike. Unaccredited investors - whether its users, friends or non-accredited investors - could become the new limited partners.

If this works, startup founders will start to be able to go direct more frequently," Lavingia said.

Despite venture capital growing as an asset class, alternative ways to raise are becoming increasingly popular to help founders maintain ownership and to access capital.

Up until this point, Gumroad has raised more than $8 million from investors, including Kleiner Perkins, First Round, Max Levchin and SV Angel, as well as others, since 2011. But today marks what Lavingia views as a long-term shift in how Gumroad raises capital. If all goes well, Gumroad will continue raising via crowdfunding on an annual basis until it goes public.

Now that companies can raise $5 million per year through crowdfunding, platforms like WeFunder, StartEngine, SeedInvest and Republic, which Lavingia is using, have a better chance to shake up the modern fundraise.

So far, Gumroad has raised $3.4 million of its $5 million goal across commitments from 3,458 investors. Investors in the crowdfund include part-time creators on Gumroad, Lavingia's Twitter followers, YouTubers, as well as Figma founder Dylan Field and partners from VC firms. In order to promote a diversity of investors, Gumroad has capped total investments from individuals at $1,000 for the first few days.

A report card for the SEC's new equity crowdfunding rules

The startup is giving up 6% of ownership as part of the financing event, and the investors will only receive equity stakes once the SAFE note turns into a round. This process could take a year, Lavingia said. The conversion round to make it happen could be an IPO, acquisition or $10 million priced round. The priced round will likely happen next year through a Reg A round, the annual limit of which is $75 million, the founder said.

The SAFE's cap is placed at a present-day 3.5x revenue multiple. In 2020, Gumroad brought in $9.2 million in net revenue, up 87% from the year prior, generating $1.08 million in net profit, up 286% from the year prior.

The new, higher crowdfunding investing cap has some downsides, according to institutional investors. A simple one is that it is an administrative burden to give hundreds of people equity in your company for a small amount of money. Another issue, one investor told TechCrunch, is that institutional investors are sometimes experts in investment areas, which is helpful in a way hundreds of smaller investors might not be. Finally, the max of crowdfunding is still $5 million a year, so the method may be less effective for later-stage companies like, say, Stripe, which needs traditional investors to buy in.

12) There are certainly many issues that still need to be resolved - such as how does a non-professional investor know what to invest in?

You can imagine influencers and sherpas with an audience replacing the concept of a VC fund.

- Elizabeth Yin (@dunkhippo33) March 15, 2021

Despite these concerns, the recent Gumroad raise is a continuation of two trends of which Lavingia has been on the forefront: building in public and the democratization of venture capital. He livestreams every Gumroad board meeting through Clubhouse and Zoom, and shares business metrics that most private companies decline to report, such as revenue and profit. (In fact, I knew about this plan to raise months ago after reading one of his newsletters.)

Readers will also remember that Lavingia was one of the first people to use the AngelList platform to create a rolling fund, which uses a 506(c) SEC regulation that allows investors to publicly solicit investments on an ongoing basis. The move was met with controversy at first, since venture capital funds have historically been raised behind closed doors.

Crowdfunding limits are poised to change next week, but most VCs aren't paying attention - yet

People were upset at the rolling fund, so imagine when they see that you are cutting out the whole industry [of venture capital]," Lavingia said, referring to a conversation he had with AngelList's Ravikant.

One thing to be wary of, Lavingia says, is the Testing the Waters dynamic. Under Reg CF and A+, startups are able to differentiate between offering and selling securities. Offering simply allows a founder to test the waters" and see if interest is there for a crowdfunded round. Despite this guardrail, commitments aren't capital. For example, a startup could get $1 million in commitments but wind up only raising $100,000, Lavingia said. The conversion rate for intended buys versus actual buys could leave some founders in a thorny spot.

His way for combating this is to be obvious about red flags and transparent, which is already in line with Gumroad's thesis.

I preceded this fundraise with a blog post that I'm the only person who works on Gumroad as an employee," he said. I want to scare off anyone who is like this is weird [from investing]."

Other than Lavingia, Backstage Capital's Arlan Hamilton has used Republic to crowdfund her firm's operating fees. Hamilton made history earlier this month when she raised $1 million in eight hours for her fund. Today, she similarly opened up investments in her firm in light of the new cap and has already closed $2.4 million.

When Hamilton spoke about the raise at TC Sessions: Justice, she said she expects another asset class to be born because venture is a broken" and old" system.

I'll probably pivot Backstage, we'll find ways and we've already started," she said. If you look at our raise we did in the Republic, it didn't exist the way we wanted it to exist, this ability to go to the crowd as a fund."

2014: income <$10,000
2016: raised first $1.2M fund
2020: deployed first $1M check"
2021: raised $1M in 8 hours

Don't give up.

- Arlan (@ArlanWasHere) March 15, 2021

The way it starts is not by a normal person doing it," Lavingia said. It's by someone who is at the tip of the spear, someone who has an interesting angle, and then it gets sort of democratized over time."

The fact that a founder turned part-time venture capitalist is using crowdfunding to raise money for his own company is a meta headache on its own. But the founder sees this as an opportunity to make crowdfunding mainstream and an attractive asset class.

Long-term, a public crowdfunding round in startups could be just a small drop in a startup's financing pre-exit, but one that could empower thousands of normal people to own startup equity for the first time.

I'm basically trying to become a private-market Chamath," he said, referring to the billionaire behind Social Capital credited with the recent boom in popularity around SPACs. I want to build a huge brand associated with investing in private equities, startups, and having an army of people that I can use and wield in different ways."

Gumroad founder Sahil Lavingia launches new seed fund in collaboration with AngelList