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Valuing Gumroad Equity, a deep dive

I announced recently that my early stage investing firm, Calm Company Fund, was taking a break and pausing our investing. The short version of that story is that while the thesis of investing in calm companies—businesses run by lean teams that grow at a sustainable profitable pace—is still very strong, the business model of raising small dedicated early stage funds was not sustainable. Since then I’ve been exploring other potential models for supporting calm companies and their founders. 

Pulling that thread, I did a short sprint consulting for Gumroad to develop an in-house strategy for investing in and acquiring businesses using their balance sheet and equity. Ultimately we decided that I wasn’t the right person to build what Gumroad needed, but in the process I did a deep dive into Gumroad itself and produced my own valuation for the company which I get to share publicly here.

Gumroad is a 13-year-old company that helps creators sell products online. The company has had a wild ride the past few years. Its core business, products sold by creators on its platform, doubled in 2020 to over $140m. In 2021 it raised $7.1m including $5m from 7,000+ investors in a crowdfunding campaign at a $100m valuation. Since then it has begun morphing into a holding company, launching two new products—Flexile, a tool for running payroll and allowing hourly freelancers to earn equity, and Helper, which uses AI to auto-draft replies to support tickets. Gumroad also made cashflow its North Star, moving from a $1m loss in 2022 to $8.9m in net profit in 2023, and issued a $5m dividend (using Flexile) to its investors and employees. Gumroad now finds itself in the enviable position of having a stable core business, a talented distributed team, a sizable balance sheet, healthy net profits every month, and valuable stock. 

As an advisor to early stage companies through my early stage investing firm, Calm Company Fund, I have often warned founders to be skeptical of stock-based acquisitions. But the strategy I was developing for Gumroad would have much of my compensation in the form of Gumroad stock, and when Gumroad started making acquisition and investment offers, we would be asking founders to consider that stock for a big chunk of the acquisition offer.

So, my first order of business was to do a skeptical “Red Team” analysis of Gumroad stock which I could share publicly with Gumroad contractors, investors, and companies we might one day seek to acquire. 

There are three different audiences who should care about the value of Gumroad’s equity:

  • Freelancers at Gumroad all have the option, through Flexile, to receive part of their cash compensation in stock options. On average employees have opted to receive about 18% of their hourly rate in equity.
  • Gumroad now has 7,000+ investors. From VC firms like Accel, Collab, and First Round, to individuals in the Reg CF crowdfunding round. All of these folks will likely have opportunities in the future to participate in a stock buyback (where Gumroad repurchases the stock), to sell to a third party, or buy more stock in future fundraises.
  • Founders, who are going to start seeing acquisition offers from Gumroad that are partially in stock.

For the most part these folks should all have the same interests and concerns, but I’ll also highlight a few special considerations for each throughout the report.

Here are the biggest takeaways:

  • Gumroad’s 2021 valuations of $100m (Reg CF crowdfunding) and $125m (Series C+) were probably overvalued relative to the company’s core metrics at the time. This was the primary reason that, despite liking Gumroad as a company, my own fund declined to invest in these rounds. 
  • With hindsight, 2021 was a time in which virtually all company valuations got a little detached from reality. In comparison to public and private peers, Gumroad was not really an outlier. 
  • Over the next 3 years, Gumroad’s business changed dramatically, doubling revenue and growing net income by 800%. The business has grown into those prior valuations in a way that most private tech companies have not. 
  • Based on those new metrics, the $100m valuation at which Gumroad currently issues equity (to freelancers) seems even slightly undervalued, both on a fundamental cash flow basis and compared to other public companies. 
  • Looking forward, anything in the $100-200m range seems to be a fair risk-adjusted valuation for Gumroad equity

Common issues with stock as compensation

I’m on the record as advising founders to be wary of selling their business for stock in another company, especially an all-stock transaction. I’ve also advised founders to be wary of large earn-outs or any other component of the deal that isn’t guaranteed cash at closing. My general advice has been: “make sure you are comfortable with the possibility that the cash at closing is the only compensation you’ll ever receive and treat anything else as a bonus.” I have such a skeptical view because, on average, these can be very bad deals for founders and I’m not able to do a giant deep dive report on every possible acquirer for them to form an opinion otherwise.

But, the idea of acquiring a company partially in stock makes a ton of sense in theory.

  • It’s more tax-efficient for both parties
  • It keeps some skin in the game for the seller
  • It gives the seller upside in the future value created by their business
  • It allows the acquirer to make a better total offer than they likely could for all cash

But in practice, the structure often abuses the asymmetry of information that each party has about the value of the acquirer’s stock. Here are the most common and widespread issues.

Concern #1: Overvalued stock. The company can be overvalued, meaning “$1m of stock” might not actually be worth $1m. An acquirer might say “We want to buy you for $10m: $4m cash, $4m in stock, and $2m in an earn-out.” But what “$4m in stock” actually means is “We’ll give you $4m of shares according to the price per share of the last private round of funding we did.” But that price per share is a judgment call made by investors that could have been wrong at the time or out of date. The market or the company’s situation could have changed materially since that round and since it’s not a publicly traded stock, the stock price won’t have changed since the last round. Lastly, companies who know that their last round was at a lofty valuation are the most likely to be pushing to use it as a currency for acquisitions. This is a problem in every market cycle, but particularly one where so many tech companies did their last round of funding in the last 3-4 years when valuations really became detached from reality and most companies have done everything possible to avoid doing a “down round” which would bring their price per share into a more normal range.

Concern #2: Lack of transparency. In most of these deals, the acquired founders will end up being a relatively small shareholder in the larger company. If the company is still private that can mean the company has little to no obligation to keep you informed of its plans, progress, and financial status. All this means you have next to no visibility on the value of an asset that will represent a large chunk of your net worth.

Concern #3: Lack of Liquidity. There was a time when the big public tech companies like Meta and Google were extremely active acquirers but due to the antitrust environment, they rarely do these days. Most of the time a company making a strategic acquisition of your business will be a growth-stage company that is big enough that its primary plan for liquidity is one day going public. As a small shareholder, you’re along for the ride, hoping the business gets big and successful enough to IPO in a good market when you can finally start selling some shares. Most likely you’ll spend years without being able to turn your acquisition shares into anything valuable for you or your family.

Have I made my point yet? This is a Red Team analysis and I’m not going to pull any punches: founders should start from a position of skepticism of acquisition offers that have a large stock component and be very wary of all/majority-stock exits. The internet is awash in horror stories of founders who worked their butts off for years, sold their company for what on paper was a life-changing amount of stock, only to spend years and years with no liquidity and zero information on the most important asset in their net worth.

Similar issues exist for employees choosing to be compensated in equity. And investors in private startups generally know these to be the risks of the game. However investors and employees are making a trade between equity or cash (a non-productive asset) or having to find something else better to invest in (not always easy). It’s easier and less risky to make this trade than for founders who would be selling a highly productive asset (equity in their company) for stock, making these issues more acute for founders.

With all that in mind, I believe Gumroad is a unique company that founders should actually consider a deal that contained some percentage of Gumroad stock. I think Sahil, the CEO, has done a pretty admirable job addressing each of these core concerns, making Gumroad equity a win-win trade for founders. Let’s dive in.

Gumroad’s unusual funding history

The trajectory of a Gumroad stockholder is radically unlike that of almost any other tech startup stock.

Gumroad raised a total of $8.1m in a seed and Series A round in 2012. They hired a team and built a product that creators used to sell nearly $40m per year in online products, but it wasn’t the kind of hockey stick growth that Venture Capital investors needed to see to raise a Series B. In one of the more intense “trough of sorrow” stories I’ve ever heard—detailed at length on Sahil’s blog—Gumroad laid off the entire team in 2015 and slowly built the company back to profitable over the next 5 years.

In 2020 the creator economy received a huge boost from COVID pandemic. Gumroad’s Gross Merchandise Value (GMV) which is the total amount of products creators sold on the platform, doubled that year to over $140m. With a strong tailwind, Gumroad took the opportunity to raise a fresh round of capital to kickstart the next chapter of the business. In 2021 Gumroad raised a Series C of $1m from private investors and $5m from over 7,000 investors in a crowdfunding round at a $100m valuation, followed by a Series C+ of $2.1m from private investors at $125m.

That range of $100-125m is still the relevant valuation for Gumroad today. Gumroad currently issues employee equity, via its in-house product Flexile, at the $100m valuation (more on that below) and would likely use a similar range for acquisition offers that were partially in stock.

A brief detour into 409A Valuations

Many jobs at startups or public companies will include some sort of equity component to their compensation packages. While you might informally hear this called being issued equity, technically they are usually going to receive stock options, which are not actually equity yet. A stock option is a right to buy a certain quantity of shares in the company at a set “strike price.” So you might be issued a stock option to buy 1,000 shares at $1.05 per share, but to actually own those shares you need to exercise those options by paying $1,050, and only then do you own equity.

So how is that price per share determined?

When a company is publicly traded on a stock exchange this is easy: options are issued at the share price of the company’s stock. The market sets the price of the stock and stock options are issued.

For private companies this is more complicated. When a private company in the US issues stock options it must comply with IRS code Section 409A by (a) having a third-party firm determine the Fair Market Value (FMV) and (b) issuing the options with a strike price according to FMV. So when a professional 409A firm decides a company is worth $10m and the company has 4,000,000 shares in total, then the strike price for new options has to be set at $2.50/share. Companies are required to update their 409A at least every year and more frequently if there is a major event like a new round of funding.

Ok, that sounds a lot like a valuation for the company. Why don’t we use that number and call it a day?

409A valuations are typically lower than the valuation that private investors will put on the company. This is due to several reasons including:

  • Fair Market Value is supposed to be more sober and not really include optimistic assumptions about future growth that might be implicit in the valuation of a venture or growth round of funding.
  • 409A firms include hefty discounts on valuation for the effects of preferred equity, and the illiquidity of private company stock. These discounts are directionally correct—there should be some kind of discount—but the magnitude of the discount applied is mostly arbitrary.
  • Most importantly, companies really want the FMV/strike price to be as low as possible so that stock options are as valuable as possible to employees. Just like with hiring a firm to lower your taxes, 409A firms are incentivized to do everything legally allowed to reduce the FMV.

The main point is that nobody should be alarmed by a 409A valuation or option strike price that implies a much lower valuation than the company is raising money at.

The Fair Market Value process can be a bit silly for early-stage fast-growing startup. Trying to build a cash flow model for a company with hardly any revenue and no profits makes little sense. But, it actually offers a good basis for evaluating a more mature profitable company like Gumroad.

The FMV has three methodologies:

  1. Discounted Cash Flows: the old school method of building a spreadsheet of the expected future profits/dividends and applying a discount rate.
  2. Public and private company comparisons: finding similar companies and triangulating comparisons across public stock prices and recent private market rounds.
  3. Net Asset Value: adding up the value of the individual assets owned by the company.

The first two are relevant approaches for valuing Gumroad, while the third is really more for real estate or asset-heavy companies. While the goal of a FMV process is to “pick a number” for the valuation, we’ll use these different methodologies to create scenarios and triangulate around a rough range that we think makes sense for Gumroad.

Valuing Gumroad Equity

I’m going to approach this the way that I think as an investor. I’m not claiming to be a public markets expert and I also didn’t want to try to do an exhaustive valuation wading into every corner of finance debates. How to value any company is a matter of intense debate, so I’ll just walk through my thinking here. I used LLMs to capture data and used estimates and a somewhat back of the envelope approach. The goal is to triangulate to a general range of values by multiple methods.

Valuing Gumroad Method #1: Public and private comps

The first thing to say about trying to find comparable companies to Gumroad, in either public or private markets, is that it’s difficult to do. Like all companies in the “facilitating online commerce” bucket, Gumroad isn’t quite a SaaS and isn’t quite a pure fintech, payments processing company. It’s also 13-years old, which is much older and more mature than most private market counterparts. And it is quite profitable, which is rare across private and public stocks in a similar bucket. The sample size of companies that look remotely similar on key metrics was small, and there were essentially no companies that felt like great direct comparisons.

In this Red Team analysis, the main thing I was looking for is any factor by which Gumroad was an outlier in a negative way: being overpriced on any particular metrics relative to any other players in the field.

Skipping to the punchline: I wasn’t able to find any comparisons that made Gumroad’s current $100-125m valuation range look overpriced based on their current metrics.

Thanks to its surge in profitability, Gumroad looks underpriced by some measures, like PE ratio, relative to public stocks like Etsy and Shopify as well as broader S&P 500 averages. Applying a PE Ratio in the low 20s, where both Etsy and the S&P 500 index sit, would imply a ~$200m valuation for Gumroad. 

That said, last year was an exceptional year for Gumroad with a huge increase in profitability. For Gumroad to truly be fair/undervalued based on these metrics, it will need to find a way to either maintain that profitability or credibly re-invest its profits into even better opportunities.

Private Markets

Let’s briefly look at the closest private market comparisons I could find.

  • Hotmart, a Brazil-based suite of creator tools raised a Series C $130m at $1B+ valuation in 2021. Its revenue is not public, but…
  • Hotmart Acquired Teachable in 2020 for $250m when Teachable was doing $25m ARR. A 10x revenue multiple.
  • Paddle, which is a little closer to a pure payments company, raised $200m at $1.4B valuation in 2022. The best estimates I can find are that it was doing something like $60-80m in revenue. So, 17-23x revenue.
  • LemonSqueezy stated they turned down a Series A term sheet valuing the company at $50m in 2023. Their revenue figures are not public, but given that it only launched in 2021, I have to imagine that a $50m valuation would have been a very hefty revenue multiple of >25x.

While I don’t think revenue multiple is the metric for comparison (more on that below), it’s all we’ve got for these private market transactions. For reference Gumroad’s $100m valuation was around 11x 2021 revenue and $125m is less than 6x its last 4 quarters revenue. A higher revenue multiple would generally be an indicator that a company is potentially overvalued.

Personally I don’t think this tells us much because all of these private company data points are from the 2020-2023 ZIRP era where valuations went haywire. We have no idea if these companies have subsequently updated their valuation or not.

However at least we can say that Gumroad’s previous revenue multiple of 11x and current one of around 6x is definitely not materially higher (or overvalued) than any of these, which is good.

Public Markets

The public markets offer us a few more companies that we can compare to Gumroad.

Shopify and Etsy are the two best. Both have similar business models of facilitating internet commerce and earn the majority of their revenue via a percentage fee added on to all sales on the platform. Of course Gumroad facilitates digital products, whereas Etsy and Shopify are heavily focused on e-commerce of physical goods, but they’re the closest comps. Etsy (~$7B market cap) and Shopify ($84B market cap) are also much bigger companies than Gumroad ($125m last private valuation).

I also considered BigCommerce, Squarespace, and Wix. However BigCommerce doesn’t report GMV and isn’t profitable, and so couldn’t be compared on the two key metrics I use below. While Squarespace and Wix do have some e-commerce features, both generate the vast majority of their revenue from subscriptions and therefore weren’t useful comps.

Let’s compare Gumroad, Shopify, and Etsy on two metrics over the past few years.

Metric #1: P/E Ratio

The Price-to-Earnings (P/E) Ratio is considered one of the most important metrics for determining if a public company is over- or under-valued. You divide the current market cap or value of the entire business and divide it by the company’s earnings (i.e. profits) over the last twelve months. A way to think about PE Ratio is “if I bought this whole company right now, how many years would it take to recoup my investment if the company’s profits stayed consistent.”

Over the very long-term, the average P/E Ratio of the S&P 500 has been around 15-16 and in more recent decades it’s been more like ~20-25. Value Investors will use anchors like this to assume that over time overvalued stocks, with a much higher PE ratio, will see their stock price decline and return toward a more average PE, whereas companies with a below average PE might be undervalued by the market and, assuming the business otherwise does well, could become more valuable stocks to own.

This chart shows the P/E Ratio for Gumroad, Etsy, and Shopify for the past 4 years.

notes

  • For Etsy and Shopify I’m using year-end and most-recent-quarter-end public data
  • For Gumroad’s valuation I’m assuming $100m in 2021 and $125m thereafter and year-end Net Income internal data.

In 2021 both Etsy and Shopify traded like typical high growth tech stocks with P/E Ratios in the high 50s. Not the kind of numbers a value investor would like to see, but defensible given how much COVID had boosted the demand for all three companies.

The $100m valuation of Gumroad’s Series C implied a much higher >150 PE Ratio.

Now, 2021 was a crazy time. Many startups were raising rounds at 100 times revenue, much less on profits. And we saw above that the 11x revenue this valuation implied was comparable to other private companies. But that very high PE multiple is why I looked at the Gumroad round in 2021 and said, “I like Gumroad as a business but I don’t want to buy equity at that valuation” and didn’t invest.

Note: I came to that conclusion about a lot of companies in 2021-2022

But that was three years ago, let’s see what has happened since then.

In 2022 all three companies lost money as the pandemic growth surge began to plateau. Besides, indicating that the company lost money, negative PE ratios are not a useful tool and are confusing because a more negative number is actually better than a slightly negative one.

As of 2023-24:

  • Shopify has either posted losses or very small gains with a PE of 600+
  • Both Etsy and Gumroad returned to profitability
  • Etsy’s PE gliding downward from 31 to 23
  • Gumroad’s PE is around 14

Conclusion: Based on PE Ratio, Gumroad has grown into it’s $100m+ valuation from 2021. Even a $200m valuation would be a PE in the low 20s which would be about on par with it’s closest comparable Etsy and in line with the overall average of the S&P 500.

Metric #2: Price / GMV

The main downside of PE Ratios is that companies are sometimes not optimizing for earnings/profits. They may be aggressively investing in growth, acquiring other businesses, or doing deep R&D for the next big phase of the business and intentionally running at a loss or reduced profitability. This is common with private companies and startups too and the approach I like to use is to take whatever metric the company is maximizing right now and use that as another point of comparison to the valuation.

In the case of all three companies I would argue that Gross Merchandise Value (GMV), which is the total amount of products sold by merchants/creators on their respective platforms, is the metric they should be maximizing whether they are profitable or not. So I compared the market cap of each to the total GMV for each year below. Just like a PE Ratio, a higher number indicates the company may be overvalued relative to its total GMV. Price to GMV is not a common metric across all stocks, so we don’t have any real sense of what a typical number should be, but we can at least compare them to each other over time as a gut check.

This admittedly bespoke metric makes 2021 Gumroad look a little more favorable. The $100m valuation was actually considerably less than the $140m in GMV, whereas Etsy’s $28B was almost 2x its $13.5B GMV. Shopify started between the two and, after the stock price tanked in 2022, leveled off around 0.4. Etsy has rapidly moved toward a similar level around 0.5 while Gumroad sits around 0.7-0.9. This isn’t a widely used metric so we can’t read too much into it, but what I gather is:

  • All three companies Price/GMV have settled in a similar range of 0.4-0.8 with none being a huge outlier relative to each other and the past few years.
  • Based on this metric, an investor in Gumroad at the current valuation is essentially betting that Gumroad’s GMV will grow at a faster pace than Shopify or Etsy. This seems reasonable enough considering how much smaller Gumroad’s GMV is, though not guaranteed.

Comparables Conclusion:

Trading cash for Gumroad equity (via investing or as employees) was a risky bet in 2021 at the $100m valuation. It was a lofty private market valuation, though not by any means the craziest thing the venture market saw that year. You were essentially betting that Gumroad’s GMV was going to grow at a much faster rate than its larger comparables Shopify and Etsy. Personally, I thought that scenario was possible but not necessarily a good risk-adjusted bet.

But by looking only at its 2021 metrics, I overlooked Gumroad’s optionality. As interest rates began to rise and investors sought real businesses with sustainable profits, Gumroad was able to adapt quickly. Instead of spending a decade compounding GMV growth, Gumroad doubled prices, cut costs, and grew its earnings by 800%, turning it into a pretty fairly priced stock by relevant metrics.

Valuing Gumroad Method #2: Future cash flows

The other common approach for valuing a company is the discounted cash flow model (DCF) where you try to estimate the future cash flows to the owners of the company and compute the return to investors.

How should we model the equity in a private company?

Most of the time trying to actually “model” a company—taking all the inputs about the company itself, its products, market demand, and macro conditions and predicting what the business will look like in the future—is an exercise in confirmation bias. There’s so much wiggle room and uncertainty on every input that you end up producing a spreadsheet that… surprise!… says exactly what you had a hunch it might say.

Rather than building one forecast, I believe a specific kind of scenario analysis is a better approach.

First I built a simple napkin math 10-year model of the most important inputs and outputs of the company. In Gumroad’s case this would be GMV (the total creator sales on the platform), Revenue (Gumroad’s fees on those sales), New Revenue from new subscription products (ie Flexile), Net Income (the profits from the combined revenue streams), Dividends, and finally the Sale Value of Gumroad stock at the end of those ten years.

The final output from the model is Internal Rate of Return (IRR) which is the annualized rate of return to the investors. From these metrics I decide which levers are the most important and create some scenarios that show how changes in each lever affects IRR.

The levers I chose for Gumroad were:

  • GMV growth: Gumroad’s core business is helping creators sell products online and it still puts most of its energy into helping creators sell more.
  • New Revenue streams: Gumroad is evolving into more of a holding company than a single product company, incubating several new products and intending to acquire others. I’ve assumed that these new products will primarily be subscription revenue products that add Annual Recurring Revenue to Gumroad’s financials.
  • The final PE Ratio of the Sale Value of Gumroad equity: As discussed in the previous section, Gumroad’s PE Ratio is currently around 13 while its closest public comparable (Etsy) and the broader stock market is in the low 20s. If Gumroad can maintain its profitability its reasonable to look at a scenario where the equity value of Gumroad stock converges toward that PE Ratio range. This is a multiplier on all the other assumptions since positive improvement in GMV growth or New Revenue will both increase Gumroad’s profits/dividends to investors along the way and increase the final value of the equity in 10 years.

The initial scenarios where I will only change one variable at a time are not realistic forecasts, since in the real world, positive movement on one front of the business would likely be associated with other positive movements, but it’s useful to see how each one impacts the outcome independently.

As I start to see IRR outputs, I’m less concerned with the exact number it produces and more interested in placing it in a bucket of how good of a return it is compared to other investments I could own. Here is ChatGPT’s summary of those ranges which I broadly agree with:

  • 0-5%: Low Return – Safe but minimal growth (Savings accounts, government bonds)
  • 5-10%: Moderate Return – Stable with modest growth (High-yield savings, corporate bonds)
  • 10-20%: Good Return – Balanced growth with reasonable risk (Stock market indices, real estate)
  • 20-30%: High Return – High growth with higher risk (Growth stocks, private equity)
  • 30%+: Very High Return – Significant growth with substantial risk (Venture capital, speculative stocks)

Then I play with the model and create a range of scenarios to understand what types of assumptions need to be true for this to be a moderate, good, great, or fantastic investment. Then I ask myself how likely do I think it is that those thresholds will be hit for each metric individually and then as a whole in combined scenarios.

Here is the output of a number of those scenarios for Gumroad. View the model here.

Note: I’ve done this modeling with the current value of Gumroad at $100m because that is the rate that it is currently issuing equity to contractors via Flexile.

Scenarios 1-5: Base Case and GMV growth

In these scenarios the only thing I’m changing about the business is how much GMV grows over 10 years. I’m assuming that there’s no new revenue streams and that you only get to sell your Gumroad equity in 10 years for what you paid for it. These are pretty harsh assumptions so these numbers represent a pretty good base case for the analysis.

  • In a scenario of either no growth or growth that just keeps up with inflation, if Gumroad can simply maintain its profitability for 10 years, we’re looking at a 6-7% IRR. In a world where you can get ~5% on risk-free US Treasuries, that’s definitely not the kind of return you’re looking for in exchange for the risk of investing in a single company versus getting ~5% from many low-risk investments. But it’s actually much better than the base case for many other private companies that don’t issue a dividend.
  • In order to jump into the Good Return spectrum (without finding any new subscription revenue or increasing the value of its equity), Gumroad needs to target just over 11% GMV growth. It’s been a weird few years for the creator economy, so it’s hard to know what kind of growth rate is reasonable to expect but this feels pretty reasonable to me.
  • If Gumroad matched its 2021 growth rate of 30% and compounded it over the next 10 years, growing GMV to over $2B, and somehow the value of Gumroad equity didn’t go up too, that alone would put it in a High Return bucket. 30% a year is hard to do for sure, but at the end of those 10 years the platform would still be much smaller than Etsy or Shopify are right now, so there shouldn’t be any natural limitations of the market that would make that kind of growth impossible.

Reminder: in these initial scenarios I’m just trying to understand how responsive Gumroad’s performance is to GMV growth. Scenarios 9-11 represent more realistic outcomes where high growth rates also result in an increase in the value of Gumroad equity.

For comparison here is YoY GMV growth every year since its founding:

The trajectory of the past few years—with very strong growth in 2020/21 followed by a flattening in 2022/24—was similar across the entire e-commerce economy, where COVID pulled forward a huge increase in demand that then cooled and pulled back. Also Gumroad increased their prices in 2022 which should have the effect of causing some users to churn, while making those who stay on the platform more profitable. Candidly it makes it hard to predict what GMV growth will look like for Gumroad going forward.

Scenarios 6-8: New Revenue Streams

In these scenarios I’m adding in a second layer of revenue in the form of additional Annual Recurring Revenue (ARR) from new products. Gumroad has announced two new products, Flexile and Helper. More products are in early development and some will also be acquired. The current products have very little subscription revenue, but I think it’s reasonable to assess the impact of new products and/or acquisitions starting to contribute recurring revenue to Gumroad’s bottom line.

The model takes in a target ARR in Year 10 and then backs out a growth curve of that revenue to hit that target. I chose $10m, $25m, and $50m to analyze. Those may seem like big numbers but we are talking about targets for 10 years from now. Many startups starting from zero have more aggressive targets than this and Gumroad is “starting” from a position of having already built out a global team, a brand, user base, and a balance sheet to invest.

  • If Gumroad can add $10-25m in ARR over the next 10 years, that alone will also be enough to hit a mid-teens “Good” investment return. This assumes minimal GMV growth and no equity value growth.
  • I think this shows that Gumroad is probably right to focus on adding new products with subscription revenue. Personally, I find the prospect of adding $10-25m of new ARR in 10 years more likely, and more within Gumroad’s control, than increasing creator GMV by >20% every year. Of course they should try to do both.

Scenarios 9-11: GMV Growth x Equity Value Growth

I said that Scenarios 1-5 were not likely to be accurate because they don’t assume any increase in the value of Gumroad’s equity even as the company’s core business grows substantially. Scenarios 9-11 layer in the idea that (1) GMV grows which generates a bigger dividend to investors each year (2) the value of your Gumroad equity also grows accordingly, converging to a PE Ratio of 20 by Year 10.

I would look at these scenarios closely if you think that it’s too hard to incubate new subscription revenue products and that ultimately GMV growth alone is what will drive Gumroad’s value.

  • This is where the benefit of being a profitable “value stock” shows in the analysis. If you assume that there is healthy demand from investors to buy stocks at a PE Ratio of 20—a fair assumption since that is the average of the entire market—then profitable growth in GMV will also increase the final Sale Value of the equity.
  • These scenarios show that Gumroad does not have to hit particularly ambitious growth targets or add additional revenue streams to be a valuable stock to own with an IRR in the high teens to 20s.

This is the kind of thing I want to see personally when I am trading cash for equity in a company. I don’t want to have to believe that you’re going to pull off some unbelievable feat of entrepreneurial genius. I want to see that if you do a good job and pull off some believable goals, I’m going to get a good return on investment.

Scenarios 12-16: Combinations and Upside

These scenarios show the upside of Gumroad equity. If Gumroad can manage to grow GMV modestly, build or buy products that add a reasonable amount of New Revenue, and attract new investor interest at a modest PE Ratio, the return outputs in high 20s/low 30s would be very strong.

  • Scenario 12 shows some fairly modest assumptions on all three levers (3% GMV growth, $10m in new ARR, PE Ratio of 20) and hits an IRR just shy of 20%.
  • Scenario 15 and 16 show two ways for Gumroad to hit a $1B valuation and a very strong 30%+ IRR. Neither of these combinations (18% growth + $10m ARR or 11% growth + $55m ARR) is an easy path, but as an investor I have seen many startups banking on much more aggressive targets. They strike me as “stretch goals” rather than a hail mary.

Analysis. How high of an IRR does Gumroad need to be a good bet?

Personally I think Gumroad needs to shoot for at least an IRR in the high teens to low 20s to be a good bet for investors (or anyone trading cash for Gumroad equity). Any company can fail, but Gumroad is a mature company with 13 years operating, which is not as inherently risky as a brand new startup. Even in a high interest rate environment, I think 20% IRR would be very solid reward for the risk of owning Gumroad stock. Anything more would be a bonus.

Looking at all these scenarios, I see multiple reasonable ways for Gumroad to hit that level of return for investors at its current valuation.

Because Gumroad is already profitable, there is quite a bit of downside protection too. If Gumroad mostly flops on its current ambitions, only grows GMV modestly, doesn’t add much new subscription revenue, doesn’t increase fees at all in any way, simply collecting dividends along the way and selling the equity will be a decent outcome for investors. This kind of downside protection is rare among private tech companies, who are typically unprofitable and where missing key growth targets means the company ends in a fire sale.

Valuation Conclusion

I am a value-oriented investor who is highly skeptical of over-valued startups and passed on investing in Gumroad in 2021 because I thought it was overvalued. But no matter how I slice it, I think Gumroad is pretty fairly valued, and perhaps even a little undervalued, relative to the business it has become over the past 3 years.

Liquidity and Transparency

Besides the difficulty of valuing the stock price, the two most common criticisms of getting paid in a private company’s stock are:

  1. You don’t have visibility into the company’s financials or metrics before or after you take the stock.
  2. You probably won’t have an opportunity to sell the stock for cash until the company some day goes public.

These are valid concerns backed by many many stories of things going badly for founders. My friend Adii recently shared how after selling his business to Campaign Monitor he had a large part of his net worth tied up in their stock and learned 5 years after the fact, after getting almost no information on the company, that that stock was now worth a lot less than when he received it. So much that he saw 35% of his net worth vanish overnight. This is not an uncommon story, so founders are right to approach this with a high degree of skepticism.

But I think on both counts of transparency and liquidity Gumroad is doing much better than the typical private company.

Transparency

Gumroad’s Reg CF crowdfunding round required them to share audited financials and Sahil has been running public board meetings and sharing company metrics on a quarterly basis since then. You can watch them on YouTube and hear a candid summary of the business, financials and objectives.

Liquidity

While none of these things are guaranteed to continue, Gumroad investors so far have had far more access to liquidity than typical owners of private tech company stock through three ways:

  • Dividends: Gumroad has issued two dividends to its investors and employees and updated its charter to allow it to regularly dividend out 60% of Net Income on annual basis.
  • Stock Buybacks: Gumroad has plans this year to run a buyback program where it will offer to repurchase equity from investors who would like to sell their shares back to Gumroad. They will likely use a reverse-dutch auction to determine the price and then offer that price to all stockholders.
  • New Funding Rounds and Secondary Sales: As best as I can tell, there is still pent up demand from large investors to invest more money in Gumroad, but right now the company has no need of more cash (that’s part of why I’m here to help them figure out things to acquire). In the future, as Gumroad figures out ways to deploy capital, it may want to continue raising new funding and in each of these rounds Gumroad could offer existing investors the option to sell a portion of their shares to the new investors (instead of issuing new stock). 

In total, while Gumroad may not do all of these things every single year, most private tech companies do absolutely none of these things, which leads to the worst kinds of illiquidity outcomes that you hear about. My read is that Gumroad is genuinely committed to facilitating liquidity for shareholders and creating a virtuous cycle where that liquidity makes the stock more valuable.

Conclusion

Ultimately I’m not sure whether Gumroad will do many acquisitions, and I won’t be involved in that except to potentially send a few great opportunities their way.  While this analysis may end up just being an academic exercise, it’s clear to me that valuing profitable private tech companies is challenging and without many clear benchmarks and comparables. That extra bit of uncertainty makes it unnecessarily difficult for profitable companies to leverage their stock to retain employees and acquire businesses.

Hopefully this deep dive contributes to reducing that uncertainty.  As more and more companies pivot to calm, profitable, sustainable growth we’ll have many more opportunities to get better at valuing calm companies.

If you have questions about this post, ask me @tylertringas.

Everything I knew about stretching was wrong

In the past 12 months my body’s mobility and flexibility went from abysmal, a source of persistent pain impacting my quality of life, to pretty darn good. I’m not about to become a stretching influencer, but after a year of researching, trial and error, and hard work I feel back on track and like I have tools that will really serve me and my body for decades. I’m honestly grateful for the big wake up call and I thought I would I share the most important things I learned.

A year ago my 37 year old body was completely wrecked. It snuck up on me. In the pandemic I started seriously strength training for the first time. I spent two years lifting heavy 3-4 days per week and it worked. I gained 20 pounds of muscle. For the first time in my life I got really strong, bench pressing my bodyweight and deadlifting/squatting around 2x that.

But throughout this process, I completely utterly neglected my flexibility and mobility. Rock climbing and yoga have been main exercise for most of my adult life, but climbing gyms and yoga studios were closed or inaccessible for most of those 2 years. So I packed on layers and layers of new muscle fibers with virtually no mobility work.

On top of that, I had the most stressful two years of my life on both personal and professional fronts. I always thought the idea that “we hold stress in our {body part}” was woo woo nonsense. It isn’t. Persistent stress and tension has a real affect on our bodies.

The problem is the typical weight lifting session doesn’t require a ton of full body mobility. The barbell that stabilizes the weight, allowing you to exert the most force possible, also limits the range of motion you actually utilize at the gym.

Without my noticing it my mobility fell off a cliff. My shoulders were frozen stiff. I couldn’t raise my arms over my head, hold a basic down dog, or touch my hand to my back or shoulder blades at all. I couldn’t touch my toes or even sit on the floor comfortably. Every major muscle group was hard as a rock all the time, as if I was flexing it as hard as I could. My range of motion was laughable and everything was gobbed up with layers of fascia.

Then I started trying to use my body to do things again—rock climb, ski, bike, yoga, or just carry things up a 4th floor walk up—and my whole body imploded. First, everything felt unbelievably challenging because every single body movement felt like it was pulling against heavy resistance bands. Next, everything hurt all the time. I had persistent muscle soreness, tightness, and pain all the time. Then the last straw was the nerve pain. I started getting numbness in my fingers and periodic electric shocks of pain going up both my arms doing simple day to day things like opening a door or picking up a cooking pan.

It sucked. I felt like I was 90 years old, decrepit and in constant pain. It was seriously degrading my quality of life and I was willing to try anything and everything. So here’s what I did:

  • I went for a massage 2x/week
  • I bought a fancy Theragun massage tool
  • I went to two different local physical therapists
  • I started going to yoga 2x/week
  • I start stretching and warming up before climbing workouts

3 months of all of that did exactly nothing for my mobility issues.

Massages and percussive massage tools can provide some temporary relief but have no lasting effect.

Sorry, but it seems that most PTs have absolutely no idea how to systematically treat these kind of issues. Like a massage therapist, they would use a kind of scraping tool or some other treatment that would provide some relief, and tell me to do nerve glides, charge me $250, and tell me they’d see me next week. But the process didn’t seem to have much of a real methodology and each week felt like zero progress. My experience seems to be similar to that of many others dealing with similar issues.

Yoga and pre-workout stretching are fine for maintaining flexibility, but not effective at creating flexibility, especially when you are severely limited.

The turning point

As I have often done in my life when the conventional solutions to a problem are failing me, I turned to the Twitter community for help and also went deep down YouTube and other internet rabbit holes. And that’s how I discovered that everything I thought I knew about stretching was wrong.

The turning point was a virtual consult with Sam Martin from Move Better Project (huge thanks to Sam Segar for making that intro). Sam explained to me that the numbness and nerve pain was likely Thoracic Outlet Syndrome where my stiff gunked up inflexible muscles were compressing and trapping the median nerve that runs from the shoulder through the arm and down to the fingers.

Sam gave me a bunch of simple exercises to target each muscle group (including some hard to find ones). But he also gave me a radically better overall understanding of how stretching and mobility actually works. These fundamental ideas explained why none of the stuff I’d tried before had any real effect and laid the groundwork for me to effectively build an approach to my own mobility.

I realized that I was a bit of an extreme case. Interventions that worked for most people, felt like they barely made a dent in my issues. That’s when I discovered a number of great YouTube channels dedicated to mobility for power lifters and other beefcakes. These guys were preaching similar methods as Sam, but devising more intense variations that I needed to unlock by extremely laminated muscle fibers.

I’ll share some specific examples below, but here are the main ideas I learned that completely changed my approach to mobility.

What I learned

Hold stretches for 2 minutes (or more!). The kind of brief stretching you might do in a vinyasa yoga class poses or while warming up for a workout will have almost no effect on increasing your flexibility. To move the needle on your flexibility you need to be holding each position for at least two minutes, and sometimes more like 5+ minutes. Yes, this takes a long time. For several months while I was rebuilding my mobility I was spending 30-45 minutes almost every day on mobility.

These long holds, initially needing up to 5 minutes each, were the key to getting my shoulder mobility back into a good range.

The good news is that, at least in my experience, this only necessary when you’re trying to increase your mobility. Once you get things in a pretty good place, shorter regular stretching will do a good job of maintaining.

Smash it, don’t rub it. Rubbing your muscles mainly just increases bloodflow, which is nice, but isn’t going to break up the years of fascia and adhesions or release chronically stiff muscles. You need to smash them instead.

  1. Create pressure in the meaty part of the muscle with something like a lacrosse ball. For me I usually have to move it around until I find a particularly stiff (and painful) spot to place it.
  2. Once you find the spot, DON’T MOVE THE BALL AROUND. Keep it in that same spot and hold that pressure for ~2 minutes or until you feel like the muscle release. For me this can feel like a long time where nothing is happening except this ball is painfully jabbing into my muscles, and then out of nowhere the muscles just melt all at once. Stay in the same place until you feel that change happen.
  3. To increase the intensity and get even more relief, keep the pressure point in the same place, but start moving the muscle or limbs around it through their normal range of motion while still holding the pressure point in the same place. To understand what i mean, watch Sam in this tricep smash video and how he moves his whole arm while keeping the ball in place.

This smashing technique was the essential ingredient in finally releasing extreme tightness I developed in my pecs, from bench press-type exercises, and in my shoulder blades, from a severe muscle imbalance. More on that below.

Train your nervous system, don’t just stretch. It’s easy to think of your muscles as just some kind of rubber band and flexibility is just a matter of mechanically stretching them out so they get looser. But that’s not how it works. Most of the time your body is already physically capable of achieving the position, but you need to train your nervous system that it’s safe for it to relax into that position. So it’s not very productive to just contort your body, grit your teeth and sweat for two minutes while trying to watch TV. You will definitely get some benefit from this, but the far better approach is to consciously focus on steady breathing and mindfully relaxing the muscles one by one.

This kind of mindful breath-focused stretching has been essential for my lower body hip and hamstring mobility in particular.

Persistent tightness is as much a strength issue as a flexibility one. If you’ve figured out how to smash a muscle and stretch it and it still keeps getting tight, it’s probably a strength imbalance issue. Other muscles around it may be overdeveloped and are essentially pulling it out of balance all the time. This will feel a little counter-productive, because strength training a muscle will often make it feel tighter in the short term. But over the long-term a combination of smashing, stretching, and strengthening is often the right balance.

Mobility tools that actually work

I was in so much pain that I bought every mobility gizmo I could find. My home workout area looked like a medieval torture chamber. Most of those things are gathering dust now. Here is the short list of, mostly very cheap, mobility tools that actually work:

  • Lacrosse ball: this is your go to smashing tool.
  • Psoas tool: This is the nuclear option for smashing. It’s designed to target deep muscles like the psoas but I also found it incredibly helpful for releasing muscles in my shoulders and back.
  • Resistance bands: I used these both for building strength to correct imbalances and as a way to stretch my shoulders. I’d get a pack like this one with a door anchor unless you have something at home to anchor them to.
  • Yoga blocks: Great for support getting into positions where your flexibility is very limited like a split. Can also be used to increase the intensity of a stretch.
  • Giant yoga mat: I found it really helpful to have a large surface area to move through the positions I needed and this over-sized yoga mat was perfect.

Recommended Internet Rabbit Holes

Here are some of my favorite resources for learning more in general and finding specific suggestions for how to diagnose and target individual mobility issues.

Sam Martin, Move Better Project (YouTube): Sam’s YouTube page is filled with tons of great short videos for specific exercises. I also booked Sam for a virtual consultation which was one of the highest value things I did all year.

Smashwerx (YouTube): This was my favorite of the channels targeting more hardcore power lifters. In particular this video, involving dangling a kettlebell while you smash your pec into a bar, was the only thing I found that finally unglued my pec muscles.

Strength Side (YouTube): This is a fantastic all around strength and fitness channel and they have a bunch of good mobility routines, like this lower body one, to easily incorporate into your day to day.

Instagram: My two favorite follows right now are @kruseelite and @twstraining.

Lastly, despite all these resources, I never found a video of anything that could release the tightness in my shoulder blade that I just could not get rid of. I discovered this nuclear option muscle release using the psoas tool. Watch the video here.

 

Cooking For Founders

With COVID-19 forcing many of us indoors and cooking more (yes, this post took a little longer to go live than I planned), there’s never been a better time to really learn how to cook. I grew up not learning much about how to cook and taught myself as an adult. Over the last 5-7 years I went from someone who could do the absolute bare minimum (boil pasta, cook chicken breast, etc) to genuinely quite a decent cook. I can easily whip up dinner for 4-6 friends without stressing, cook healthy dinners at home most nights of the week, run a barbecue for 12 people, and have a small quiver of fancy dishes to impress friends, family, and my wife from time to time. This post is mostly about what works for me, but I’m calling it Cooking For Founders because I think it will resonate with a lot of entrepreneurs who think like me.

The goal of this post is not to teach you how to cook but to provide fairly comprehensive, but also minimum viable, roadmap for going from a cooking noob to solid home chef.

Why you should cook

Until I was about 25 or so I really didn’t cook much. I lived in places like NYC and London where restaurants were always open and ubiquitous and especially in these cities, it’s a perfectly reasonable position to just not bother learning to cook well. But I want to make the case that even if you have world class restaurants and food delivery services on demand, you should learn to cook.

Social: Home cooked meals are an awesome offer that people are very likely to take you up on and really appreciate. Cooking well is sexy and makes for an awesome date night. Dinner parties are fantastic well to meet new people and create a vibrant personal and professional network. Taking charge of a meal is a great way to bring your family together or impress your in-laws.

Physical Health: Even if you aren’t bothering with any particular diet (low carb, paleo, etc), cooking at home is almost always going to be more nutritious than food from restaurants. Getting actually healthy food from restaurants/delivery is almost always expensive. Cooking at home is an affordable way to get great nutrition.

Mental Health: This may be more specific to me, but I find cooking to be fantastic for my mental health. In my house I’m the one cooking about 90% of the time and I’m not into the mega meal prep strategies where you cook food for the whole week. So, most days, I’m cooking something fresh for dinner. The need to start cooking prep in time for a reasonable dinner puts a natural stopping point in my work day and then I get to switch to a very focused mono-tasking activity. This routine is, for me, a kind of meditation that separates the work day and let’s my brain process the events of the day.

Meta-learning Tips for Learning to Cook

Learning to cook is not exactly easy. There is an infinite amount of recipes, techniques, resources, diets, and on and on to consume. It can be overwhelming. Learning to cook is almost always laden with failures along the way. You’ll screw up some recipes, ruin some dishes, and get halfway through a complex recipe before realizing you’re missing some essential ingredient. Here are some lessons I’ve learned on how to learn.

Find your YouTube & TikTok muses

There is an infinite amount of cooking content on the internet, but when you find a particular chef or channel that really speaks your language, subscribe and binge their entire backlog. Lots of channels out there will skip essential explanations, use overly exotic ingredients, or complex unnecessary techniques so when you find one that consistently speaks to you, lock it in. Some ones I like:

Have a backup plan

Learning to cook and feeding yourself can be two different things, especially when you are first starting out and failure rates are high. If you are going to try a new recipe for the first time on a busy week night that’s supposed to be your dinner that night (1) go for it! (2) have a frozen pizza or some other quick and easy back up plan ready in case you end up ruining the dish. It’s a really negative feedback loop to mess up a recipe and having to end up eating cereal for dinner, so have a backup plan.

Read/watch the recipe several times well before cooking

Read or watch your recipes carefully, several times, in preparation for trying a new recipe. It’s easy to miss, especially at first, that the recipe actually requires marinating over night, or needs buttermilk or some other ingredient you don’t typically have on hand. Don’t just plop open the recipe book at 7p and start with Step #1.

Stick to a few core cookbooks

Again, it’s easy to get overwhelmed by the millions of cookbooks out there. Like YouTube channels, I recommend finding a few comprehensive cookbooks that work for you and sticking to them for years until you get very confident with a wide variety of techniques. With cookbooks, Kindle will work but having the physical copy can also be really helpful (or honestly I usually get both). Here are some that I recommend:

Essential Concepts

The books and channels above all have great introductions to all of these concepts so I’m not going to try to actually cover them here, but I think it’s useful have a few simple concepts to check off as you read/watch through the first few.

What heat does (chemistry)

Make sure you pay attention to the sections on the basic chemistry of heat. The vast majority of cooking is just different ways applying heat to food and it’s critical to understand what heat is doing to different kinds of foods. For the most part heat is either (1) denaturing proteins or (2) producing a Maillard Reaction. Denaturing proteins is the slow gradual cooking process that turns eggs from runny to scrambled or steak from rare to well done. Different foods have different kinds of proteins which denature at different temperatures and in different ways. The Maillard Reaction is browning (mostly on on meats and vegetables) and happens at very high heat and low moisture environments. Read up on these carefully. Cooking for Geeks covers these the best in my opinion.

Different kinds of heat transfer (physics)

Similarly to understanding what heat does, it’s really important to have a basic grasp of the various methods of applying heat to food. Baking, broiling, roasting, sautéing, braising, searing, sous vide, boiling, and so on, are all just different methods for applying heat. Some, like baking, use convection where the air is heated up around the food, and others, like searing in a pan, use conduction where the heat is transferred directly surface to surface. A cast iron pan takes a very long time to heat up and stays hot for a long time, whereas the air in your oven can dissipate its heat quickly. Understanding these basic concepts will give you the architecture for understanding for why you should keep the oven door closed as much as possible, dry your meat before searing, and pre-heat your heavy pans for longer than your light ones.

Keep it simple

When you are first learning to cook I recommend avoiding complex recipes in favor of simple two or three-part meals where each component is cooked individually. The vast majority of our home-cooked meals involve cooking (a) a protein like fish or meat (b) a vegetable cooked simply, like roasted in olive oil and (c) a starch like rice, potatoes, simple pasta. This let’s you build a healthy meal with simple individual components, master the same techniques with repeat practice, and minimize the risk of blowing up the whole dish.

Make it taste good

This may seem obvious, but it’s important that the food you cook actually taste good. Home-cooked food is almost always healthier than restaurant food, so don’t try to learn to cook and cook the healthiest possible version of each dish. Most veggies taste better roasted in a generous amount of olive oil than they do steamed, so roast them! Baste your chicken in butter. Salt your food generously. Learning to cook by producing dishes that just aren’t that tasty is a very bad feedback loop, so do what you need to to make it taste good.

Don’t cook everything evenly

This is a little more specific but I feel like it needs to be specifically counter-programmed. For some dumb reason a lot people (including myself 10 years ago) got the notion that food needs to be cooked evenly. That it’s really important to constantly turn and shake and rotate your food so that it’s cooked the same all the around and through. This is a great way to make gross food. Stop touching and turning your food. Most dishes are better with a substantial amount of difference in how cooked different sides of the food are: steak with a crunchy sear and medium rare inside, roasted potatoes with a waxy crust and fluffy inside, carrots or asparagus charred on side are all much tastier and mostly produced by having uneven cooking.

Baking is really hard

Really. Baking is much harder and less forgiving than any other kind of cooking. If you’re just starting to get into cooking, don’t start with baking.

Essential Gear

Okay, obviously you can spend and absolute fortune and fill a kitchen with mountains of cooking gear. That’s part of the fun of getting into cooking, let’s be honest. But if all you’ve got is a crappy 10-piece Wal-mart cooking set you got as a wedding gift or a hodge podge you inherited from your roommates, and you need to build your kitchen from scratch, this is the minimum kit I think you need. (Disclosure: most of these are Amazon affiliates links. Don’t click them if that’s a thing that will make you mad).

Pots and Pans

The essential workhorses of cooking. Different kinds of pots and pans provide really different value for money, so I’ll specifically recommend below which ones I think it makes sense to invest in something great that will last versus just get something cheap and replace it every few years. I’ve got a bunch of Amazon links below but I also highly recommend looking up a local restaurant supply store, where you can find high quality equivalents, often for a lot cheaper.

  • A large heavy saute pan. I love this 5.5-quart Cuisinart saute pan. I own two of them and use them in probably 75% of meals. Anything with high straight sides, a heavy base and a lid will do. You’ll use this for searing so it makes sense to get a high quality heavy one here, don’t skimp.
  • A 12″ non-stick skillet (optional an 8″ one too). Non-stick skillets will not last you for decades so I recommend getting a decent quality cheap one. I like these ones from Tramontina. If you only get one, go for 12″ (you can always cook less food in a larger pan but not the reverse) but an 8″ can be useful especially for egg dishes and if cooking for one person.
  • A 12″ stainless steel skillet. If you’re really going for minimalism you can use the heavy saute pan above for everything and skip this. But I find it’s frequent enough that you need to use more than one steel pan simultaneously so I recommend a good one of these. I have two of these from Tramontina.
  • An 8-quart stock pot and 2-quart sauce pan. You need at least one big pot for boiling pasta and potatoes and making stews. Again go for 8-quart or more (if you’re cooking for family) since you can always use less of a larger pot. The sauce pan is slightly less critical but will be used often enough that it makes the cut for essential. This stock pot and this sauce pan, both from Tramontina, are probably a bit nicer and pricier than absolutely necessary but will last. You definitely don’t want tinfoil thin pots here but also there’s not much benefit to getting really nice brands for this.
  • 2-3 baking sheets with wire racks. I use these constantly for roasting veggies, doing messy food prep (prepping a whole chicken is a lot easier in one of these) or for letting meat dry brine in the fridge. You don’t want to get super cheap ones here since they tend to warp which will make all your olive run to one corner when roasting veggies. I like these Nordic Ware ones which come with their own racks. I currently have 4 of these pans and 2 racks which is more than plenty. FYI, the “half sheet” size is actually the typical size that fits most ovens.
  • Optional but cool: a cast iron pan. I think you can honestly skip cast iron when first learning. Cast iron is hard to take care of and can really hold its high heat too long for many beginner cooks. You can use the heavy saucepan above as a substitute for any recipe calling for cast iron. But if you want one, go for it. I have this 12″ Lodge which is cheap enough to just grab it even if it’s not strictly necessary.

Cooking Tools

This is the minimum viable set. No need to get anything fancy.

  • 2-3 sets of stainless steel tongs. This is the essential tool most likely to be missing from basic kitchen setups. I use tongs for every meal and it’s infinitely easier to move food around with tongs versus pushing food around a pan with a spatula. Get at least two in case you touch raw meat with one you don’t have to stop and wash them mid-cook. These ones are fine but honestly anything will do that has this basic shape. I don’t bother with the square wire-shaped tongs which are useless. I also have a set with non-stick tips but there are tons of situations where only the stainless steel will be able to easily grab the food so prioritize those.
  • Fish turner spatula. Not just for fish! Similar to tongs this is the most likely to be missing from basic kitchens and I use it all the time. Get stainless steel for scraping nicely browned food off stainless steal pans or baking sheets. I have this one.
  • Basic set of wooden spoons and spatulas. Literally any of these sets will do fine but make sure there is a flat-tipped spatula in there. Mine is a hodge podge a hodge podge but here’s a decent set (I would add a soup ladle to this too).
  • Micro-plane zester. Yes, you will use this all the time and it’s cheap so it’s in the essential list.
  • Instant read digital cooking thermometer. You need at least one when learning to cook meats. I have this hand-held one and this “probe” style one that can be left in during long slow cooks.

Prep

Almost everything on this list, just get the cheapest version you can find.

  • Stainless Steel Mixing bowls. Just get the most basic set possible. Here’s a ridiculous good deal that includes a bunch of the other items on this list.
  • 4-6 “mis en place” prep bowls. Pre-chopping your ingredients is really helpful when you’re starting. I have eight of these but again the cheapest things you can find will be great.
  • Measuring cup set and large heat-safe glass measuring cup. You need a full set of measuring cups and one of these glass pitcher measuring things (I have a set of 3 but if you only get one go for the 2-cup one).
  • Strainer. You need at least one (I also have a few smaller ones). Get at least one that is large enough that you can lay it across your sink, giving you two hands to pour into it. This is a great one.
  • A dozen or so bar towels. Having these on hand for clean up, drying, and a quick alternative to hot pads is indispensable and will really cut down on your paper towel use. I have, a lot, of these.

Knives

You need just a few knives but you should get decent ones.

  • Chef’s knife. 90% of all knife work happens with this so get a good one. I have this 8″ from Global which is great and I also have the one from Misen, which is considerably cheaper and still pretty great.
  • Pairing knife. Nice and small and useful when the Chef’s knife is too big and unwieldy. Again I have the one from Global but the Misen one is probably great (I don’t have that one).
  • Serrated knife. You need at least one of these. Most folks recommend a bread knife but I don’t find myself cutting huge loaves of bread that often, so I have a serrated utility knife like this one. In general I think you can get by with a cheaper knife when it’s serrated vs a straight edge so feel free to substitute this for something cheaper and prioritize a nice chef’s knife.
  • Honing rod. Get one of these. Learn how to use it. Straighten your knife’s edge before every time you use it. Ceramic ones like this are best.
  • Large cutting board. Get the biggest one that you can reasonably use in your kitchen. There’s nothing more annoying than running out of cutting board space when prepping. I have a comically large one I got at IKEA that barely fits in our sink and it’s a game-changer. This one looks good to me.
  • Smaller plastic cutting boards. Especially if you’re cutting and prepping meat, it can be nice to not have to wash your cutting board mid-prep. I have 3-4 of these.

Storage

Cooking means leftovers so get a good set of storage containers.

  • I have a bunch of these Cambro containers because that’s what chef’s use and I’m a geek. But get any good set of 8-12 containers that nests well.
  • Gallon ziploc bags. I try to avoid disposable things in my cooking but this is the one unavoidable tool for freezing and marinated.

Optional but great

Everything here is not strictly essential but if I had any room left in the budget this is what I would prioritize.

  • Instant Pot. We use this at least once a week to make stews, chili, beans, or rice.
  • Blender or food processor. We have this Vitamix which is about the most lux thing in our kitchen but it’s still going strong five years later and it absolutely handles anything we throw at it.
  • Salt pig and pepper mill. Get yourself some Diamond Crystal Kosher salt and fill up this salt pig. I have no idea why it’s called a salt pig. Fresh peppercorns ground in your own pepper mill (I use this one) is a serious upgrade.
  • Box grater. Handy but very single use so it doesn’t make the essentials list.

And that’s it. It can definitely be a daunting shopping list if starting more or less from scratch but that’s why I started this post with all of the life-long benefits of learning to cook. It’s worth it!

Some Essential Skills & Techniques

Once you have your essential gear, you will need to start practicing some essential skills that are the building blocks of most recipes. All of these are explained in the books I suggested but I wanted to quickly flag the best approach to the most important ones.

Chop & Prep

Don’t re-invent the wheel here. Basically every food item has a well-known best practice for how to chop or otherwise prep it. Just search them on YouTube and learn them one by one as they come up in recipes. Here’s a mega video on how to prep every vegetable.

Searing

Searing requires a Maillard Reaction which means very high heat plus low moisture. Learn how to properly dry your meat and veggies, how to pre-heat appropriately, and how salt interacts with moisture (it pulls it to the surface of meat which can prevent browning). Use high smoke point oils like grapeseed or avocado for searing, not olive oil. Pay special attention this as a good sear versus a mediocre one can make all the difference in some dishes.

Roasting

I love roasting vegetables. Prep them to create flat surfaces that make direct contact with the pan. Minimize moisture so you get browning. Use enough oil. The outside edges of the pan are hotter than the middle so arrange the thicker pieces on the outside. This is a great video with tons of tips for veggies.

Sautée

Pre-heat. Don’t crowd the pan. Learn to test the heat with your hand. Resist the urge to move or shake stuff once you put it in the pan.

Cleaning

Change your sponges regularly. Get some Bar Keepers Friend to deep clean your stainless steel pans. Get this little bottle brush which is made for baby bottles but comes in handy a lot.

Get Cooking

That’s everything I know about how to get started cooking. Get your gear, buy some books, subscribe to some YouTube and TikTok channels and get cooking.

2021 SaaS Market Predictions

I’m an investor now so I suppose I need to start making predictions 🙂

These are not so much predictions as, things already in progress that I feel I’m able to see a little bit earlier than most folks by looking at 1,000s of early stage bootstrapper-minded software companies. So here we go:

Everything is Micro-SaaS now

I think I coined the term “Micro-SaaS”… it’s not all that original, so maybe somebody else did it first. But I mention that here because that makes it sort of matter what I intended the term to imply. In my mind, the “micro” in Micro-SaaS referred not to the size of the company or product, but to the scope of the problem being solved. I would usually define it as a product tackling a problem that could be truly solved with a solo founder or very small team. At the time (maybe 7 years ago now) I didn’t think it was possible to build a direct Salesforce or Heroku or Airbnb competitor with a very small team, but you could build a very profitable Shopify app or highly niche SaaS as a solo founder. The point of Micro-SaaS was to get founders to think about those kinds of problems versus only thinking about massive markets that would almost certainly require a large team and lot of funding.

But, by that definition, everything is a Micro-SaaS now.

The scope of what problems can be truly tackled by one founder or a very small team has expanded so much that it includes virtually all SaaS businesses. This is a function of what I call the Peace Dividend of the SaaS Wars. Briefly, that there are so many off the shelf tools, platforms, plugins, and services, that a small team can tackle bigger jobs to be done, well beyond the original scope of what was a Micro-SaaS. I think in 2021 and beyond we are going to start to see small teams tackle really big problems that previously would have been crazy to take on.

True No-Code SaaS businesses go prime time

For a few years now it’s been clear that no-code tools were enabling powerful and complex automations that previously required custom-coded solutions. The question has been asked, will founders be able to build a true software as a service, recurring revenue, profitable, scalable business on top of no-code tools. But until recently, the no-code tools solved discrete internal problems well, but there were gaps between the tools that made it impossible to connect these into something that competed with a custom-coded SaaS product. But those gaps have closed.

At Earnest Capital, we have recently invested in several founders doing exactly that. 2021 is the year this will go mainstream.

The beginning of the end of “Empty SaaS”

In the first few waves of SaaS, the primary innovation was the SaaS aspect: cloud-based, remote friendly, payable via subscription, updates on demand. A lot of successful SaaS products out there are effectively just SaaSified version of prior software products that already existed and were sold in shrink-wrapped plastic. A ton of these products follow a pattern that I call “empty SaaS”: you sign up and are dumped into an empty page of rows, record, contacts, expenses, tasks, projects, etc and told to “fill it up with stuff.” The burden of creating value and doing the work is still pushed entirely onto the user.

I think this is increasingly not good enough and the table stakes for new products will be raised to force products to create more value against the actual job the customer wants done. We’re seeing early versions of this already. Customers don’t want bookkeeping software, they want their books done, so we get Bench and Pilot. I think we’ll see this percolate throughout the SaaS markets created tons of opportunity for new entrants who do a better job of not being empty.

By the way, a few ideas on how to not be empty SaaS:

  • Add a “done for you” service layer on top of your core software
  • Curate an expert network who can use the software for your customers
  • Build in one-click quick-start templates based on key customer goals
  • Build bots, scrapers, and simple machine learning to automatically “fill up” your customers’ data

More funding for SaaS bootstrappers

Im talking my own book here but I think we are going to see an inflection point in funding for bootstrappers this year. A handful of funds and firms now have multi-year successful track records showing that this market of entrepreneurs building profitable software companies is a great one to invest in, even at the earliest stages. This year we’ll see existing firms expand and (hopefully) several new entrants. This is great news for entrepreneurs who will see increasingly more options and a better chance of finding the investment partner that is the best fit for them. If you’re a founder and that sounds interesting to you, start here.

On Indexing the Early-Stage Market of Funding for Bootstrappers

Lately several people have asked me, is “Earnest Capital trying to index early-stage software companies?” The answer is “no, not really” but there is an interesting discussion to be had around the idea of indexing so it’s worth unpacking.

AngelList Data shows that “indexing” early-stage (pre-seed/seed) investing produces superior returns than picking deals.

One reason this is even an idea is that AngelList released a pretty interested white paper about the idea of “indexing” (buying a weighted average basket of all deals versus investing in individual deals). I did a thread reacting to the white paper here:

AngelList is a platform for angel investors and now funds to invest in startups and they have a pretty broad dataset of deals. Their data science team ran the numbers and found that if you had invested in a weighted average “index” where you are invested in every credible deal on the platform, you would almost always generate better returns than picking 10, 20, or 50 deals yourself.

The reason for this effect is the power law: in the AngelList dataset, a huge portion of the total returns to all investors comes from a tiny number of individual investments like Uber, Stripe, Airbnb. Of the 3,000 seed deals, if you missed out on any of these, your portfolio would underperform the index. The more extreme these individual outcomes become, the more the index will beat any individual picker.

Some important caveats:

  • They say this only holds true for early stage seed and pre-seed deals, at the later stages this effect goes away.
  • Every credible deal is an important distinction. Investing in literally every entrepreneur with an idea would obviously not produce superior returns given the number of bad ideas that never get off the ground. But how to measure “credible” is not at all obvious. A short-hand way to do it is “any deal with an actual VC fund leading the round.” Which to me seems like a better-than-nothing solution but not totally convincing.

Some thoughts on AngelList data

The returns to indexing, while technically better than not indexing, are still not very good and in my opinion don’t clear the hurdle of sufficient return relative to the risk. A reasonable conclusion might be: indexing is better than picking, both produce pretty bad returns, so the best advice is just don’t do angel/early-stage investing.

Returns *excluding* the >50% of investments that fail

These returns exclude all the losing investments that went to zero (at least half). So you can cut these by half to get a general sense of what the actual return to investors is: median of less than 1x your money back, mean of slightly above 1x your back. Not great.

Indexing doesn’t get you any of tangential value of angel investing, which for many people is most of the value:

  • Build relationships with smart founders
  • Learn a ton via company updates and pitching dealflow
  • Potentially get a huge out-sized win

Indexing across a theme

In my opinion the best way to adapt to these realities is to take the idea of indexing and apply it not to “all early-stage startups” but to a specific investing theme or trend that you (a) think is a strong bet and (b) you want to learn more about and plug into.

I think new funds like Andreas Klinger’s Remote First Capital (focused on remote work startups) or Ben Tossell’s new fund focusing on no-code tools and others, would do well to simply adopt an indexing approach: define a thesis of what is/is not in your purview, and write a small check into every credible (has a lead VC) deal that comes your way. This builds the greatest chance to back the right break-out company within a strong thesis, while also accumulating knowledge and expertise about an eco-system. I’ll be curious to see if anybody adopts this approach.

But it all hinges on the power law

The dataset here is not neutral. It is “expected” that they find an extreme power law of outcomes certainly in part because AngelList is a platform for exactly this kind of investing. It’s dominated by Silicon Valley investors and folks who read Naval, Jason Calcanis, and other proponents of the style of investing which is all about backing the next Uber or Airbnb.

A principle bet of Earnest is that power law investing is not a law of physics when it comes to early stage investing. We coined the idea of Early Stage Value Investing, to contrast with the kind of Early Stage Growth Investing that happens on AngelList and in VC. Doing a seed deal and then encouraging the founder to hire aggressively at top tier salaries, hit lofty weekly growth metrics, spend down their seed round in 12-18 months, introducing them to VCs to raise more capital if they can achieve those growth rates… all of this make it both more likely that the company will some day be a unicorn AND more likely that it will fail, making the distributions of outcomes a more extreme power law than if you encouraged a founder to hire cautiously, focus on positive unit economics, and get to profitability quickly. See our Fund 2 thesis for the much longer version of this argument.

So in summary, indexing early-stage beats individual picking if you’re operating in an extreme power law environment, but doesn’t make sense if you’re not.

Does Earnest Capital do indexing?

So coming back to the original question and the answer is No, and this whole discussion is why.

1. We’re not doing power law style investing. We don’t expect, and our strategy isn’t predicated on the idea, that one or two investments will be 90% of our returns. We are maximizing the number of successful entrepreneurs in our portfolio. So the idea that the index will out-perform loses efficacy the less extreme the distribution. The AngelList paper found that in later stage deals, when the distribution of outcomes becomes less extreme, the effect goes away.

2. We’re clearly doing something much closer to active management / picking. In doing our first 20 investments, we looked at over 2,000 opportunities. Yes I know this is a vanity metric, but it’s relevant here because we’re just obviously not “indexing” this market with that kind of ratio. We could probably have invested in ~100 of those with more capital, but a very large number of the opportunities were not viable investments (or at least not yet).

3. There really is no benchmark for credible deals in our space. Public stock indices need the public market traders (and subsequent market caps) to know which companies to include in the index. Indexing requires some sort of external form of validation. In our market the only thing comparable would be customer revenue, which is is a great form of validation but there are still plenty of businesses that get to $1k-5k in MRR that wouldn’t make for great investments. We have to be our own form of validation (maybe some day somebody will index us with a Fund of Funds?). Essentially, you can’t index something that doesn’t already have a robust market of active managers creating a good threshold for credibility and that is definitely not the case in the “funding for bootstrappers” market.

So we don’t do indexing. We’re actively betting on the opportunities we think are most likely to succeed. So far that’s going pretty well but we’ve got a lot of ways to get better too.