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.