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Reflecting on My Failure to Build a Billion-Dollar Company (medium.com)
2101 points by jamesjyu 44 days ago | hide | past | web | favorite | 353 comments



Hey, #1 on Hacker News! I don't think that's happened since...I launched Gumroad back in 2011:

https://news.ycombinator.com/item?id=2406614

Thanks HN for being a part of my journey!


I love your story Sahil, it is so true that people equate 'wealth' with 'success' but that is short sighted. If you step back and look at the big picture, you're on this planet for anywhere from 70 to 100 years, and at the end of that time there are two metrics, the number of people you helped and the amount of wealth you amassed and held on to, which number is a better representative of 'success'?

Working on things you enjoy, making a positive impact on people's lives, and raising a new generation to carry on where you left off, that is success.

Stay focused there and you might accidentally accumulate so much wealth you have to work at putting it to use helping people like Bill does!


> at the end of that time there are two metrics, the number of people you helped and the amount of wealth you amassed and held on to, which number is a better representative of 'success'?

Let's not forget personal satisfaction. I'm a little leery of putting the entire assessment of my life onto other people (even though if I was going to, I could do a lot worse than number of people helped).

Hopefully helping other people leads to some amount of personal satisfaction for most people, and they'll have a fairly good life and good impact on others by the end. :)


> personal satisfaction

You can be one of the people you help.


Personal satisfaction doesn't matter once you're dead. Those other things do. And your entire assessment of your life at that point will be put onto other people.

With that said, optimizing for after you're dead might be selfish and reasonably desirable, but there's a lot to be said for optimizing for tomorrow instead. Life would be pretty pointless if none of us were supposed to optimize for some enjoyment while we're here.


>Personal satisfaction doesn't matter once you're dead.

Nothing matters to you once your dead. Other peoples' assessment of your life is irrelevant to you.

I would rather live my life happy with my decisions (part of which is helping people because of my own morals) rather than helping a bunch of people in ways that make me miserable.


One wonders why you have those morals if they mean so little to you. And if you don't need to justify your behaviors to others, why are you trying to justify them to me?


It's called having a discussion. You felt like participating, why isn't the person you are replying to given the same courtesy?


Um... Because I don't believe "other peoples' assessment of your life is irrelevant to you."


That is your reason for not being courteous?


Intentionally being provocative here, but by that logic, why does your effect on other people matter? You are unlikely to leave a lasting legacy, and the generation you do affect, will die as well.


> You are unlikely to leave a lasting legacy, and the generation you do affect, will die as well.

By this logic, culture and society would die every generation, and have to be rebuilt from scratch each time.

We all leave behind a "small" but far-reaching legacy that ripples out from our short lifetime. Each of the thousands of interactions we have with with other people and our general environment have a tiny but real impact that doesn't necessarily diminish to zero after we die. The change that occurs then has a small domino effect on any other person or system that it touches. And so on and so forth :)

My life today is deeply affected by the concerted actions of billions of unknown individuals from centuries and millennia past in ways that I can't even begin to fathom. I'm grateful for some of those impacts. For other impacts less so, but I hope to contribute small changes for the benefit those who live in the untold distant future.


I completely agree that wanting to make a positive impact on the world is important, although, and I don't want to sound too nihilistic here, the actual magnitude of that will probably be small for most people, therefore I think that personal satisfaction in life should be important and isn't meaningless, which was what OP claimed and the reason why I asked that question.


Yeah small and quickly diminishing over time, outside of very close friends and direct descendants. For example how many fought in WW2? How many were in high level roles and instrumental to the conflict? How many would be thinking they were making a lasting impact on the world? And of those what small portion have pretty much a permanent place in the history books?

Even to pick a small part of it, 130,000 people worked on the Manhattan Project but a history of it that the average person would consume might name 10 key figures.


The long-term impact of any human activity is so much more than what is written in a history book somewhere. A history book is an enormously compressed, somewhat distorted depiction of human experience. Only a very small sliver of the actual fiber of human culture, achievement, and experience across time is recorded in this way. Yet all of these things are still happening, and they form the substrate upon which the events that are actually written down can take place.

To use your example of the Manhattan project: only 10 people may be remembered in books, but they certainly would have never completed the project by themselves. The contributions of those other thousands of individuals was vital to the project's success. If they didn't exist, it's not a guarantee that you could have replaced all of them -- the project may have simply failed.


> We all leave behind a "small" but far-reaching legacy that ripples out from our short lifetime. Each of the thousands of interactions we have with with other people and our general environment have a tiny but real impact that doesn't necessarily diminish to zero after we die.

What you do in life, echoes in eternity.


Well, my point was really more that the orignal claim was explicitly talking about "at the end" of the timeframe, so we're talking about near death -- where putting weight on immediate gratification is harder to justify.

But to address your question: people 'take the limit' and argue that life is just meaningless in every way all the time. If it were true, you shouldn't be bothered to make that effort in the first place. Obviously your actions matter to other people by the sheer virtue of the fact that you're optimizing for it. if you weren't, you wouldn't have bothered to ask the question.

Sometimes life is what you actually do, not merely what you think.


“Nothing matters once you’re dead” seems inescapable until you realize that it’s based on the rather flimsy presupposition that presentism is true and eternalism is false.


at the end of that time there are two metrics, the number of people you helped and the amount of wealth you amassed and held on to

I don't disagree with your overall point, but I do wonder why those should be the only two metrics to consider. IMO, the range of metrics is nearly infinite and highly subjective.


Agreed, these two metrics are just as arbitrary as any other life-defining metric, "the number of healthy grand children you had", "the number of phish concerts you went to", "the number of Free AOL hours CDs you collected"


"the number of phish concerts you went to"

Yep. For me it's "number of Mötley Crüe concerts attended" and "number of Trans-Siberian Orchestra concerts attended".

(currently "4" and "4 or 5" respectively)


My wife and I have missed the Trans-Siberian Orchestra every year for 10 years, but we REALLY want to go. It's almost a running joke at this point. This year I set about a dozen alerts that'll start going off at the end of summer to make sure I don't forget to get the tickets.


Oh man... I cannot recommend seeing TSO live highly enough. The music is amazing enough by itself, but the live shows - with the lights, the pyro, the video screens, and all the other "stuff" they do - are an absolutely amazing spectacle.

I'm also very happy that they've slowly been incorporating more old Savatage songs into their sets. :-)


> "4 or 5"

I'm curious now: is there a story behind this ambiguity?


Not really. I just don't remember exactly which years I went. I think I went to my first TSO show in like 2004 or 2005, and for a while I was keeping to a cadence of going every other year... but I haven't been for the past couple of years, and I've lost track of exactly how many times I've seen them.


>at the end of that time there are two metrics, the number of people you helped and the amount of wealth you amassed and held on to, which number is a better representative of 'success'?

But of course those are highly correlated - it's easier to help a lot of people if you have plenty of surplus wealth and time to share out. I'd imagine that Warren Buffet will end up helping more people that almost anyone else in the past 100 years despite never really having a goal other than "make lots of money."


I couldn't possibly disagree more. For starters, I think the majority of those who accumulate massive wealth do so at the expense of countless others. Buffet is an excellent example, actually. As probably the premier monopolist of the late 20th and 21st centuries, he has played a huge role in consolidating industries and destroying US wage growth. That's probably the single most detrimental macro trend in terms of quality of life over the last 50 years. His charitable donations have been fantastic, but the man has truly been a parasite on economic growth for his entire career. I would have a hard time believing the good offsets the bad in his case.

But in addition to that, there is absolutely nothing to suggest that the extremely wealthy are generally a positive force in society. Many give nothing or close to nothing back, and often work against the interests of others in so many ways (trying to decrease their own tax burden, hoarding wealth in assets, disproportionately damaging the environment, etc.)

Americans in particular worship the wealthy, but I really believe that it is utterly misguided.


That you can help more people if you have more money is simply a fact, it's not an argument based on the statistically average behavior of wealthy Americans. And as to the sources of wealth, the economy is not a zero sum game. Lebron getting paid $30mm doesn't take money away from anybody.

As far as Warren Buffet goes, I don't worship him - he got pretty lucky, was a little bit disciplined, and rode a wave of increasing value of American stocks for 40 years - but to say he has been a "premier monopolist" (hint: having high profit margins on the back of brand recognition like Coca-Cola and Apple have done is not what a monopoly is) or is a "parasite on economic growth," is only your own preconceived bias.

And as far as the behavior of the very wealthy in general, the things you describe are things that the middle class or the poor do as well. The vast majority of human beings are assholes, unfortunately. If you do happen to be a good person, though, I think the world is better off if you're wealthy than if you're poor. And if you set out to do the most good possible in the world, then choosing a career where you can make a lot of money, and then donating a large portion of it, is not a bad way to go. Doubly so if you can help people along the way, as many doctors or lawyers with pro bono hours do.


Based on the revenue and growth rates of Gumroad my guess is Sahil will make more money from it than he would have at Pinterest. It will take longer but it will be on his terms.


How is that even remotely possible, unless he got no equity in pinterest? They are ~10b IPO'ing this year. Even 1 basis point of pinterest is worth more than what Gumroad brought in.


He owns the majority of Gumroad. Let’s say he had 100 basis points of Pinterest, call it 50% dilution, he’d walk away with $50m. That’s probably very generous, probably actually closer to $20m.

Gumroad will be worth that in a few years at this rate, and he could cash million dollar paychecks along the way if he wanted.


So he'll be worth $50M in a few years with Gumroad. Meanwhile his original investors lost all the millions they invested. His employees lost all the time and vesting. Ouch.

That's why it's way to dangerous to just follow any guy and do a startup and waste a few years of your life.


> So he'll be worth $50M in a few years with Gumroad.

That's my best guess, yes.

> Meanwhile his investors lost all the millions they invested.

Well, some sold his equity back to him for $1, so yes.

> His employees lost all the time and vesting.

Well the employees could have exercised their grants when they were laid off, but I doubt they were inclined to double down on what was then a failing company.

> That's why it's way to dangerous to just follow any guy and do a startup and waste a few years of your life.

I mean, the employees got paid all along the way, and probably not that much less (if any) than they would have working for another company, and they got to work on something they loved.

Sad that it didn't work out. These things are risky, but having worked at startups and not gained anything from the equity I would do it again in a heartbeat.


The employees got paid less because of vesting. It is a gamble and this story shows different outcomes for employees. Pinterest paided off and gumtree didn't.

In both cases the founder made between 20-50 million.


Both employees and founders vest.

Founders own more of the company than employees, of course. The good news is anyone can start a company!


Agreed but if you choose to be an employee opt for higher salary over vested future value for better game theory results.


Unless the company is successful, in which case you should do the opposite


Actually, his employees got a ton of experience building systems and processes the “hard way,” from ground zero at a startup. This inevitably made them more attractive to whomever they decided to work with afterward — startup, large company, whatever — especially as they were let go into a frenzy of hiring by other firms.

And if, God forbid, they wanted to start their own company and waste a few more years of their life (your words, not mine!), well... Everything is easier when you’ve seen someone else do it.


1 basis point of $10b is $1m. It's pretty easy to see someone paying him well over that to buy GumRoad at some point.


I will guess that as employee #2, he had more than 1 basis point.


Yeah, I think employee #2 would be in the range of 50 - 300 basis points. (0.5% - 3%)


I hadn't heard of Gumroad before -- it actually looks like a really good product, and one that I would have occasion to recommend to people.

To what do you attribute the challenges?

Were you building a product there wasn't a market for, what you were delivering wasn't what people wanted?

Or, a marketting failure, inability to get enough people to know about it, and to understand how it would fit their needs?

Or, what I think I get from your post, is maybe you think neither of these -- rather you just tried to grow _too quickly_, quicker than the market/product could bear, and then had to deal with that.

Do you think if from the start you had _not_ tried to create a "billion dollar company", stayed smaller, accepted less investment with clearer expectations, had fewer employees, etc. -- you would have still been able to get to where you are now, but quicker and with less pain? You still would have been able to get _enough_ investment, and with the investment you had still would have been able to build the product succesfully?

I think maybe that's what your essay is implying you are suggesting, but I'm not totally sure if that's what you mean to be suggesting; or maybe you don't mean to be "diagnosing" it at all and aren't interested in these questions of what-could-have-been at this point. :)


I really tried to avoid being prescriptive about the solutions. It's a lot easier to talk about the problems :)

> aren't interested in these questions of what-could-have-been at this point

Exactly. If we shipped this or that feature... If we raised more, or less.. If I stayed at Pinterest... If I invested in Bitcoin...

I'm just not sure I gain a lot from thoughts like that!


Thanks for sharing this. It's really important not to give too much thought to hypotheticals as they're purely that: a hypothetical.


"inability to get enough people to know about it, and to understand how it would fit their needs?"

Just from visiting the landing page for gumroad.com, I wasn't clear about what the company did. Some questions that came to my mind:

By e-commerce, is it like shopify or like stripe? By audience-building software, is that SEO, marketing, or analytics?

Just writing the feedback I like to get from others. The features page answered most of my questions in general(I think its an online store platform for digital goods?).


> "inability to get enough people to know about it, and to understand how it would fit their needs?"

It's a bit ironic that one of the main features of the product is "audience building for creators".


Thanks for writing this Sahil.

> But I was accountable to our creators, our employees, and our investors–in that order. We helped thousands of creators get paid, every month. About $2,500,000 was going to go into the pockets of creators — for rent checks and mortgages, for student loans and kids’ college funds. And it was only growing! Could I really just turn that faucet off?

I really appreciate that you value being beholden to your customers more than your investors. It seems like as you've bought back your ownership you've had more opportunity to run your company the way you want to, and I admire that that way is doing right by your customers. If I ever start my own company, I would like to run it this way.


I was reading an article recently about managing small business growth. Not tech or startup related, just a good old fashioned blog post from an accountant who said hey you've started a business and it's growing, here are some things to consider. (I've lost the link unfortunately.)

One point this guy made was that a lot of businesses develop additional overheads and need a lot of cash to grow after they reach around $1M in annual sales. Going from $1M->$10M is a big step which is hard to self-fund, there is some risk involved, and the owner's mindset needs to change.

I couldn't help but think, hey a consistent annual $1M in sales is quite an achievement by itself. If you own most or all of the equity in that company, financially you're doing far better than most people (OK, maybe less true if you run in certain Bay Area circles). This is a perspective you won't hear from VCs, but if you hit that milestone, who says you have to go higher?

Maybe it's OK for a founder to just stop at some point, especially if they don't enjoy what they're doing or they've been under-investing in other areas of their life.


People addicted to Startup Porn GREATLY underestimate the value of a business that generates a million dollars a year.


> People addicted to Startup Porn GREATLY underestimate the value of a business that generates a million dollars a year.

Annual sales of $1M does not mean "generating a million dollars a year". In some industries, those $1M in sales might be as low as $30k to $50k in earnings (though it would probably be more for a software company).


Semantics aside, I'll say it again: people addicted to Startup Porn GREATLY underestimate the value of a business that generates a million dollars a year. Even if the earnings are 5% or 3% or even 1% ....getting someone to give you that much money for something you are selling is a lot harder than most people realize. Whether it's a million widgets at one dollar each or one widget at a million dollars, that's a LOT of money to be transacting.


It's not just "semantics": We're talking about an order of magnitude difference, and revenue is not the same as earnings.

> getting someone to give you that much money for something you are selling is a lot harder than most people realize

Absolutely, I agree! But the value of a business – which you were talking about – isn't determined by its revenue alone. In fact, earnings and earnings growth determine the value of a business a lot more than revenue.

Even for a "mom and pop" business – especially for a mom and pop business – earnings are much more important than total revenue.


Apologies for the snark but my original comment was intended to say "profit of 1 million a year"; my shorthand of "generate" inadvertently created some shade of gray and I might have been well served to simply clarify.

Then I thought about it and said to thyself, "actually, a million is a lot either way." I've actually founded two companies that grossed over a million in a year (one at about 40% gross, 5% net and one closer to 75/65) and both times have required a whole lot of work.

So my fault for being vague, not intended.


The business world is vast and diverse so generalizations are tricky, but as an example, the combined profit and owner compensation on an owner-operated service business with a $1M annual turnover can be 25-30%. The VC model would put this all back into growth (plus more) and try to go for broke. The mom and pop model might try to live frugally and sock away as much of that annual $250K as possible for 10 hard working years, then sell the business for a modest multiple of revenue. With a relatively low risk business strategy, this puts mom and pop in the top 5% of American households for the duration of running the business and probably higher in retirement. (Yes, software and other giants have eaten a lot of these businesses in the US, but they're still around.)


Haha, it was crazy reading the discussion (in 2011) around whether Gumroad should take Bitcoin or not :-)

https://news.ycombinator.com/item?id=2407053


Ha, didn't expect to find my own comment there.

I also mentioned selling jQuery plugins (remember jQuery?) and advertising my own game engine (now free) in the thread. Feels like such a long time ago.

Gratz for pulling it off, Sahil!


Thanks for sharing your story, Sahil. Something I was wondering: do you think that Gumroad could have gotten to where it was without raising money to begin with? You mentioned sales not really changing with or whithout a sales team, but do you think you could have developed Gumroad in the beginning with a smaller group of developers, or even just by yourself?


I don't think Gumroad could be the high-quality, full-featured product it is today without raising VC funding. Less, maybe, but bootstrapped, no.

(Though, I was living in SF.)


What was the biggest cost sink? Engineering, marketing, sales?


Hello Sahil, thanks so much for sharing this. I know it helps a lot of founders out there.

One question: You mentioned that you raised ~$8m from investors, but that your liq. preferences used to be $16.5m. Was there a 2x preference in the Series A term sheet?


$1.1M @ 1X

$7M @ 1X

$2.25M (the bridge I mention) @ 4X


I don't see the bridge mentioned. But thanks a lot for clearing that up. There's so little data out there on companies' term sheets so it's always good to get a dose of real world.


Oops, I think I nixed that to use in a future article purely on raising money. My bad!


Thank you for sharing your story. It was inspiring to read.

Couldn’t quite spot the failure though... maybe ESL thing.


Thanks for sharing your story.

I am a huge fan of gumroad, I remember your interviews on podcasts when you launched.

I have a couple Gumroad T-Shirts that are still my favs.

I have bought info products using Gumroad and it's a great experience.

Will definitely use you guys to sell my own in the future.

Thanks again.


Any thoughts on the recent drama on the changes on Patreon and their funding round?


Came to ask similarly... it seems the functionality that Patreon offers would be a good start for parallel expansion/features.


I had terrible experience with Gumroad (more info: https://news.ycombinator.com/item?id=13139000) and even pinged you on quora: https://qr.ae/TUrSmp No response what so ever. I still believe Gumroad provides one of arrogant customer support I ever received.

If you have 'startup' with so many unhappy customer - its expected to fail. https://gumroad.pissedconsumer.com/review.html Focus more on being open, transparent and being kind. Good luck!


Any chance of finding these images again? They are 404'ing now but I'd love to see.

https://letscrate.com/gumroad/gumroad-progress


Just wondering how much of your decision for not starting new venture could be because of burn out. You can always hire your one person replacement to do customer service, fix occasional bugs etc so you move on. Especially if you hunt for good freelancer offshore/remote, you probably can do it with more devs and cheaply. This I wouldn’t recommend for spinning new products but for maintaining existing mature enough products it works out fairly well and lifestyle-level revenue is good enough to do this. Shouldn’t this allow you to move on to new ventures?


Sahil, thanks for sharing your story to date. I remember meeting with you in 2011 in Palo Alto shortly after your launch, and I could tell then you had the “right stuff.” Proud of you man.


Gumroad is really cool, bought lots of tutorials on 3d modelling, photoshop, texturing etc.. Maybe 100 or so. The platform does not get in the way and has useful ui.


Sahil,

thanks for writing this article. very useful to me (as someone working on iteration 2 of a company).

(If you see this, could you please fix the paypal integration. In India, we don't have any protection if credit card data gets leaked, (and could end up paying off whatever the hacker charges the card) and I don't use my credit card online if I can help it

Thanks in advance)


Hi Sahil, Thanks for sharing the amazing story. I was wondering, since Gumroad's announcement about 2-3 years ago [1], is the plan to open source Gumroad still on track?

Thank you.

[1] https://twitter.com/gumroad/status/811650470758359040


From the the article in OP:

> Soon, we will also open-source the whole product, WordPress-style. Anyone will be able to deploy their own version of Gumroad, make the changes they want, and sell the content they want, without us being the middle-man.


I missed that totally, thanks!


Thanks so much for telling that story.

In hindsight, what do you make of companies choosing or rejecting venture funding in the first place?


Hi Sahil, who are your most prominent competitors? Do you consider Patreon a competitor? I'm asking since with so many platforms for selling items online I find it surprising there is still room for more companies in this space.


Hey Sahil,

Big fan of Gumroad! As a customer, it's one of the neatest checkout flows I've come across, among Stripe.

Do you have any plans to expand into subscription offerings?



Oh that's great! I'm gonna look into integrating Gumroad into my product in that case. One question: Do you support domestic cards from India? Or just credit cards?

Because that's a problem I face with Stripe as well.


Good job man! Money isn't everything.


Cool! Ive bought multiple video lessons from Gumroad before! Nice to hear from you :)


I remember this very well and telling my sibling to use your service



Congrats on the success


Hi Sahil, I don't know why but I see you a lot in my LinkedIn feed. Hope you succeed even more in building Gumroad. Just visited Gumroad for the first time. Here is some of my feedback based on initial impressions. 1) The homepage seems to be designed around creators and not customers. It's trying too hard to onboard creators while ignoring the main source of revenue for the entire ecosystem, the customer. 2) The search bar for products is not very useful. It felt like I already need to know what I wanted to buy. There should be an alternative way for discovering, for example, top 10 selling items in each category. Like the first page a customer sees when visiting Amazon. 3) The review system although designed to help customers make more informed decisions, is not useful at this point in the product cycle. I could only find 5-10 ratings on every product. Compare this to the several 1000 reviews on Amazon products makes me scared to spend money on Gumroad. I don't want to be too critical of the product but I feel like your motivations are genuine and hate to see you struggle. So, wanted share some honest feedback.


Really love this post. My favorite line is:

> Every month of less than 20% growth should have been a red flag.

I think that's pretty insightful. 20% growth is great for a normal business, of course; for a VC-backed startup it can show some warning signs about future hard decisions you might have to face.

I think there's certainly lots of discussion that has been had — and should be had — about "should I or shouldn't I raise money?", but there still are plenty of companies and founders who will raise VC, and paying attention to those early warning signs are important if that's the choice you make. It's important to worry about it each month and each week rather than the two months surrounding the raise of your next round.


These “metrics” are exactly why you see these venture backed SV companies engage in the behavior we saw posted all over the front page of HN yesterday (I.e. silently apply workers tips to their “guaranteed” pay and pocket the difference). But hey it’s an HN/SV unicorn, so there is too much investment that needs to be made back to fail now...and they have the perfect back story, rejected from YC until they personally delivered PG a 6 pack of beer and pretended they had a functional product.

It allows them to continue to make the representations of growth to future investors, the more buy in have from investors, the more you can continue these market/marketing manipulations (e.g. the fyer festival).

Of course the entire SV ethos encourages this behavior: move fast and break things, growth hacking, and fake it till you make it. It’s also built into the system that 9 out of 10 of these scams will fail, but every 10th scam can be offloaded to the public through an IPO.


Exactly - having enough capital to waste in this way IS a morality issue.


> The idea behind Gumroad was simple: Creators and others should be able to sell their products directly to their audiences with quick, simple links. No need for a storefront.

Then:

> For the type of business we were trying to build, every month of less than 20% growth should have been a red flag.

According to what metric? This isn't meant to be snarky, but that type of growth rounds out to about 900% over the course of a year. Even if it meant that they'd grow 20% in the first month and had profits plateau immediately (i.e. 20% -> 16% -> 14% -> 12.5%), that's still 240% growth over the first year. What kind of business expects 900% to be the minimum growth over the first year?


According to the metric of Social Media.

The Metric you have to meet now is Facebook's growth rate in the first few years of launching with high gross. 500% first year, 250% next year etc...


Yeah it appears this is a perfectly fine and successful business... it just went through an odd route for someone to figure that out.

Those charts and numbers, all pretty good IMO. If someone came to me and said "Hey I (or we) made this thing here is what it does and the numbers." I'd be all about high fives and such. And yet at times they didn't think so based on the route they went, very interesting.

I always wonder if there is value lost in companies that are shuttered because something isn't the next big hit, or some private equity decides they want to cash out / break up a company that otherwise... would be just fine and would have continued contribute.


>I always wonder if there is value lost in companies that are shuttered because something isn't the next big hit, or some private equity decides they want to cash out / break up a company that otherwise... would be just fine and would have continued contribute.

Of course there is, but you have to compare it with the opportunity cost of working at something world-changing.


For the individual maybe I get that.

But even from an individual perspective, I gotta think there are folks who would be fine working at a more ... not world changing business too. But these companies sometimes get shutdown or torn apart because they're not something else.


Let's run some numbers. Say you are VC putting in $1M in 100 companies. To your great luck all companies become self-sustaining lifestyle business. By definition, lifestyle business is making just enough for comfortable lifestyle of founder, so may be $300K/yr pre-tax. Let's say founder decides to give back 10% of $300K as return on investment. At that rate, it would take 33 years for VC to just recoup his original investment.

I wanted to illustrate this because it is necessary to understand why things are the way are. Lifestyle businesses is not viable for VC funding. You add on risk profile (i..e 80% of companies won't even become profitable) you get the only outcome that one or two super-hits needs to occur to cover for rest of the failures. Also remember that even with this strategy most VC funds are not even as profitable as S&P500 index.


Yes, but hopefully your average founder will wise up to the following: The chances of you being super successful, happy and content are much higher with a "lifestyle business" than a VC funded one.

Why?

Well, the biggest issue is that VCs can diversify (as you point out, have a lot of bets counting on a few successes), while founders can't.

I think for the vast, vast majority of people, there are greatly diminishing returns after a certain amount of money. That is, if you have a 1/10 chance of having a $10 million payout, vs a 1/1000 chance of a $100 million payout, I think most people would take the former. Put another way, most people are willing to take a good deal of risk for "fuck you" money, but fuck you money for most people is MUCH lower than what VCs expect with a unicorn.

Since VCs do always need to swing for the fences, they invariable will say no to ideas that don't have a huge potential market. My belief is then that there are a number of "mid market" businesses, i.e. ones catering to smaller niches, that have a lot of potential but have lower competition than huge, winner-take-all type businesses.


> That is, if you have a 1/10 chance of having a $10 million payout, vs a 1/1000 chance of a $100 million payout

1/10 chance of $10mil is higher expected value than 1/1000 of $100mil. Of course anybody sane will take the former and not the latter.

I think you'll find the tune different if the latter had been 1/1000 chance of $1 billion.


But again my whole point is that expected value is itself a very poor metric to use for this decision, precisely because a founder doesn't get many "swings at bat" like a VC does. Even in the case where the expected value is the same, the fact that the actual value leads to 0 for all but the very, very, very luckiest/skilled means you get St. Petersburg paradox-like results.


Yup. In reality, it tends to be something more like a 4/3/2/1 split. If you are a VC and invest in 10 companies, 4 will fail outright within 5 years, 3 will be somewhere between zombie companies and lifestyle businesses (both of which are effectively negative ROI for a VC), 2 will be modest successes, and 1 will be a massive success.


But when VCs are criticized for obsessing over hyper-growth, we're not really talking about $300K/yr businesses. We're talking about $5M/yr businesses that are forced to try and become $500M/yr businesses or go bust, rather than stabilizing at a lower level.


Actually 20% per year would be great for most businesses, which just shows what an outlier VC backed businesses have become.


It's also an unsustainable growth rate. But of course, VCs know that. They just need something that can front load the growth like that and unload it on the public before that growth plateaus... or plummets.


Indeed. GP said exactly that!


It is still baffling to me that the tech world has glommed onto a business model where steady growth and a solid core of loyal, happy customers is considered a failure.


It is because a startup is an investment vehicle, not a business.

If someone had X amount of dollars they want to maximize the rate of return on that wealth. The point of growth in investing is that you can see the future before it happens and pocket the difference.

For example if I invest in company Y and they are growing at a certain rate, I can sell my portion of the company based upon expected future potential. If the buyer of my shares believes the company will become 30% larger in 5 years, that is not much more than they would earn if they had some investment that return 5% a year. If the buyer of my shares believes my stock will be worth 100% more in 5 years that would now be equivalent to a return of 15% a year.

So here comes the trick. Even 10% a year would be a great rate of return. So I can sell my shares at a premium. Pocketing the 5% today as opposed to waiting 5 years. If I can pocket 7% or even 10% of that would be even better. Now if this company will be worth 500% more in 5 years, you can see how I would stand to make a large amount of money today by selling my asset that will be worth much more later.

With a company growing at a normal speed, there is not much of a premium I can extract for future growth to a potential buyer of my shares.


Indeed. I guess I should say, I understand the appeal for investors, I just don't get why so many founders are getting suckered into it.

I suppose the investors are selling them a dream of fame, fortune, and early retirement, shored up with the implication that "if all these financial wizards want to invest in me, I must be on the right track." The fact that the investor expects most of his investments to fail, because he only needs one big success to wipe out all the failures, is glossed over.


> I just don't get why so many founders are getting suckered into it.

because they either don't understand what's being done to them (after all, VCs can be very smooth talking), and the prospect of faster wealth gains for the founders also doesn't help.


It's called being "living dead" or "zombie", and it's considered worse than failure. smh


20% growth per month in itself has such a non-meaning. It really depends on where you are coming from.

If you start with 10 users in month 1 all you need is 90 users in month 12 to have 20% MoM growth. Well, that's doable.

If you start with a million though you need to have 9 million by the end of said year. Tougher to find 8 MM new users than 80, don't you think?

If you're someone like Facebook with a billion users, good luck finding 9 Billion after 12 months of growth ;)


This would be 9x per year. What are examples of companies with such a growth rate?


Startups. To choose a recent one that turned big, Facebook was approaching such numbers: https://i.guim.co.uk/img/static/sys-images/Guardian/Pix/pict...


Not even close.

If you start at 1 million users, 20% monthly growth for 9 years means you would have 13,375,565,248,934 users, or a little over 13 trillion.


You don't need 20% monthly growth for 9 straight years, but for your first year and maybe the second after your Series A you do. Although I'd say 10-20% is more the range.

The reason this is true is that your investors are giving you a lot of money.

Think of it this way, I have a big idea, and I've turned that into a small product making say 10k a month. What I'm telling the investor is that I NEED these millions to turn this small product into the big idea, and that I'm ready to scale this out.

At the point I'm asking you for money, I'm representing that I have the product that the market wants. I'm representing the marking is huge, and that I need this investment to take advantage of it.

Its not unreasonable to say that with that kind of money I can take something that's making around 10k a month and turn that into 30-100k (10% to 20% MoM growth) a month in a year.


In your first few years your base is going to be low, is it a bad month if you went from 1000 to 1100 customers instead of 1200?

The way I think about things is that there is some market with a size Y (or, size X now, but with the hope it will grow to Y). You need to service a certain percentage of that market to achieve economies of scale that make a business worthwhile, and capture enough that you have some sort of moat. In the presence of VC-money, that percentage has to be high enough that there's an upside to investors.

Given that goal and the idea that you only have so much runway to get there, because you'll either run out of money, or risk a competitor capturing the market. As long as you are on the right trajectory things are good.

The reason that I think monthly growth is a poor metric because it's looking at the delta and ignoring the goal. It doesn't matter if you hit 10-20% or more every month if you aren't going to capture the total market you need to succeed. Also number of customers is a poor proxy, because you can have a weak business model and lose money on most transactions as demonstrated by Pets.com.


Yep. $1M ARR -> $9M ARR right after series A would kill 99% of startups :)

In b2b & esp enterprise, a solid co seems:

* Year 0, 1: $0K-$1M (e.g., POC money or OSS project at another employer) ...

* Year X: $1M ARR <-- series a territory

* Year X+1: $2-4M ARR (ideally 3X+)

* Year X+2: $5-10M ARR (2X+) <-- series b territory

* ...

* IPO: $200M+ @ 1.5X growth

That's based on recent IPOs. b/c big seeds and series a concentration, maybe diff for current crop?

The post resonates. It took us awhile on "0->X" b/c we do deep tech vs vanilla saas, and had to get it to the point we can start cranking on more pure-product stuff. So for deep tech co's, you either make no true product and flip, or do a lot of work before even getting to the real business journey.


I’m incredibly grateful for Gumroad - Lambda School (YC S17) wouldn’t exist without it.

We threw up a my book on Gumroad because why not/it was easy, and now I believe we’re sitting north of $100k in sales. I don’t think we would have put it anywhere else - wasn’t worth the effort. I often think about how important it is to remove even the slightest amount of friction as a result.

I also find the move from KPCB admirable. They gave up their interest in the company (it was a loss for them anyway) and allowed the company to flourish. Hats off for that.


Indie.vc is built to make this not admirable, but the norm. I think KPCB is amazing and should be totally shouted out for this, but indie.vc is building an entire model so that founders don't have to choose.


It's interesting how Lambda School was able to capitalize on investors pumping cash into and hyping up Gumroad.

It's a smart move to capture some of that VC money without having to pitch anything to them.


Not sure that entirely follows; Gumroad may have existed whether VCs pumped money in or not, but I hear what you're saying.

In a way every time you ride in an Uber or Lyft you're capitalizing on investors pumping cash into companies.

Luckily the winners make enough to pay for all the losses of the losers.


I'm starting to think that you can't achieve anything these days unless you're riding some kind of well capitalized trend.


Or, alternatively, every trend will be well capitalized


I think that cause and effect reinforce each other but I think that social connections and capital are stronger forces.

Following the money is the most popular overarching trend. I know this because I used to not follow the money at all and it was a big financial mistake for me.

I've worked on many trends that were not well capitalized and not given due attention. Especially in open source; there are so many great solutions which are ignored completely. When there is no money, 99% of people leave; the ones that stay are the smartest, most critical-thinking type of people but they're not the kinds of people who can create hype and drive trends towards newsworthy goals because news only cares about money.

I work in cryptocurrency now (after a decade of free open source work) and I can attest that it's not the same kind of people.

A product without capital almost never gets attention. Capital without a product is what 99% of successful ICOs are. To some extent this is also true for many startups too.


I was basically alone. I didn’t have a team, nor an office. And San Francisco was full of startups raising gobs more money, building amazing teams, and shipping great products. Some of my friends became billionaires. Meanwhile, I had to run a “measly” lifestyle business. It wasn’t what I wanted to do, but I had to keep the ship from sinking.

There's that term again, "lifestyle business." Uttered like a dirty word, when in fact Sahil has an actual product that many thousands of people use and pay for. I'm one of them.

Meanwhile, many startups aren’t true businesses – they book no revenue, and they may not even have a sellable product. That’s fine, because almost all businesses start with an idea or a dream or a need or pure desperation, and it’s up to the founders to make it work. They may even need investment, too – sometimes a lot of it. And that’s fine, too.

But when people from the startup world use the term “lifestyle business” to describe real businesses that aren’t pure tech, have solo founders, don’t take VC money, don’t intend to scale to a billion users, or whatever other qualities are not worthy of investor consideration, I find it condescending and misguided. Some startups could actually learn a thing or two from the vendor who sells hot dogs in the park, the person who starts up a specialist marketing agency, the partnership that builds a ceramics factory, or the solo founder running a media distribution and sales platform. They have products or services to sell. They have customers. They book revenue, pay their employees and suppliers, and if they do things right, may even become really successful.

In short, people who run small businesses are not hobbyists or dilettantes. They’re entrepreneurs doing real business selling something, often with limited capital and without the glamor or hype.

Kudos to Sahil for what he's accomplished. But for the love of Pete, please stop using the term "lifestyle business."


"lifestyle business" is really just a small business that works, is self-sustaining, and not overly bloated to attempt to make obscene amounts of $$$.

I feel like this is exactly what most companies should strive for. They'll make better decisions that way.


Most businesses should strive to be self-sustaining. And if they make obscene amounts of money, all the power to them.

What I dislike is A) the view from startup land that there are only two types of new businesses, "startups" and everything else ("lifestyle") B) and the "everything else" category is somehow inferior or even some sort of hobby or vanity project. Sahil used the term to describe his own company, and at one point felt shame about it, even though he had a real business with real customers and real revenue.

That's how twisted the mindset in startup land has become, where real business owners are supposed to feel shame, and "success" is based on as-yet unfulfilled promises and raising a round?


Gumroad took 10.35MM in investment to build a company that does 780k/yr (65k/mo*12mo) in profit. The numbers don't work out to call that a success.

If he bootstrapped and reached 780k/mo after 8 years of work that would be a successful lifestyle business and he should be absolutely proud.

I'm absolutely not trying to be judgmental as I've succeeded and failed at businesses myself.


> a company that does 780k/yr (65k/mo12mo)*

$65k is the gross profit, which appears to be before operating expenses are accounted for. He doesn't list the net profit in the tweet (as he does elsewhere in the post). In the other mention, net profit was just under 1/4 of gross profit. So he's probably netting somewhere around $15-25k/mo, depending on how much of his costs are fixed/variable. Still good, but considering how many millions went into the business, not great.


That's actually not a bad return on investment (7.5% yearly)


It's not a good return on investment because the underlying asset hasn't appreciated 7.5%/yr some 8 years later. I am not a valuation expert but as a small business I'd estimate a 3x EBITDA placing the valuation at 2.34MM. The investors presumably owned a fraction of that.


There's a time value on that money. If you'd put $10M into an S&P 500 index fund in 2011, it'd be worth about $22M now, which first of all is a fair bit more than 7.5% and secondly is the denominator you're looking for to figure out percentage returns on capital now. The company wasn't making $780K/year in profit in 2011, it took 7 years to get there.


That's timing though, historically I believe s&p yields 7% per year on average.


Assuming reinvested dividends, the S&P has returned 7% real, or 10% nominal over its lifetime.


And the return on venture capital during those slow periods are also presumably lower (due to recessions etc)


Risk adjusted its a pretty poor return. Also you are completely ignoring the time value of money.


And it doesn’t stop there. The money certainly isn’t vaporized as with a failed business.


>>If he bootstrapped and reached 780k/mo after 8 years of work that would be a successful lifestyle business

I find it difficult to call $10M/year a “lifestyle business.”

To me, lifestyle business means a business that can support the owner in their lifestyle. So unless the owner spends millions of dollars every year...


I think the parent mistyped and meant $780k per year, not month. $780k/mo is an entirely different beast, and would be a success regardless of whether it were bootstrapped or had taken $10mm in capital.


There's a legit distinction, though, between startups and other businesses - startups are designed to grow fast. [0] That doesn't mean they're better, but you have to know the difference or you're going to get yourself in trouble. Is a quarter-horse better than a camel? Yes, if you're trying to win a quarter-mile race; not so much if you're trying to survive in the desert.

I think some of the disdain comes from legit growth startups trying to distance themselves from one-man "startups" that could be better categorized as micro-ISVs or side projects.

But there's definitely no shame to running a successful lifestyle business. The 37signals guys have been great at shifting that perspective.

[0] http://www.paulgraham.com/growth.html


There's a legit distinction, though, between startups and other businesses - startups are designed to grow fast. [0]

I respect and admire pg as much as probably anybody on this board, but I still reject the idea that he has any particular standing to declare his subjective definition of "startup" to be "the" definition by fiat.

I would argue that "startup" actually refers to "businesses that are designed to grow big", where the speed at which you do so is mostly irrelevant. If one wants to raise VC money and tie themselves to that particular time-boxed constraint, that's great. But you can just as well do it "slow and steady" by focusing on early profitability and continually and incrementally reinvesting profits back into the company for growth.

Neither is "better" or "worse" than the other, except in context, just as with the quarter-horse/camel example.


the definition I've used for years is "a startup is a business creating a new business model or service over the internet". Because there were so many people around me who were/are part of the startup scene, building businesses that were/are definitely "startups" and yet not focused exclusively on growth.


> There's a legit distinction, though, between startups and other businesses - startups are designed to grow fast.

Perhaps in the US, and probably in just a small part of the US. Everywhere else, a startup is just a new business.


So I think the point that many folks would make is that maybe we should call a new business a “new business” or a “small business” rather than a “startup”.

While I realize people don’t always like to use constraining labels, limiting the word “startup” to businesses that are aggressively seeking a rocket-ship trajectory actually strikes me as a useful convention.


There's a legit distinction, though, between startups and other businesses - startups are designed to grow fast.

Are they, though?

I have looked at the incoming classes of various startup accelerators over the years and see lots of niche-focused products and services that can never grow to anything more than a niche-focused product or service as described in their pitch decks.

I'm not putting down those types of businesses (or proto-businesses). I'm just pointing out that they don't have a high-growth profile or potential, the primary dividing line between "startups" and everything else dubbed "lifestyle" in investor circles.


This seems to be a HN thing. Most places, a 'startup' is just someone trying to bootstrap a business into profitability so that, well, they have a profitable business. If you end up with a business that pays your wages, you win. If you end up with a business that pays your wages without you having to work full time (or at all) then you really win.

On HN, a "startup" is a moonshot backed by venture capital, and is seen as a failure if it doesn't achieve a massive valuation and take over the world. You read about businesses with "mere" million-dollar-plus revenues being shut down because they're "unsuccessful". It's insane.


As far as YC goes, it seems that they are investing in companies they think might be able to dominate a niche in the hope that a few of them use that as a springboard to a much larger market.


Although 37signals are often touted as being the poster child for building a lifestyle business, many people forgot they raised ~$10mm in private equity from Bezos in 2006. There are much better examples out there, but as with the nature of lifestyle businesses you aren't going to hear about them as they are rather boring to the media.


Keep in mind that HN is a website operated by Y Combinator, a company in the business of developing and launching startups that will raise more money through the VC system. The core business model involves encouraging companies to take more money at better valuations. If you view the startup world from the HN lens, it's all about the VCs and how to maximize their returns at all costs. Those incentives run counter to the values of sustainable profitability and doing right by customers.


Also, keep in mind that HN is mostly user curated, and represent the views of it's participants more than ycombinator itself.


I agree about the unjustifiable dichotomy much of the tech scene holds between "startups" and everything else (as you describe it).

I think it's funny, though, that non-tech industry leaders critiqued Bezos in the past for running a 'lifestyle business' when in fact Amazon was always a technology company and has become dominant and successful to boot.


Not to mention that Amazon has returned more to investors over the last 10 years than many startups and Unicorns have.


The great Scott McNealy quote about Sun really resonated with me:

> We kicked butt, had fun, didn't cheat, loved our customers and changed computing forever

... and in many ways, it seems like only a "lifestyle business" can really prioritize those over core revenue and growth metrics.

Bryan Cantrill's discussion is also great: https://www.youtube.com/watch?v=-zRN7XLCRhc&t=2000


Isnt a "lifestyle" business a business to support the lifestyle of the founder? IE money is not typically a problem, either the company is profitable or the founder will support it loss making. The main function of the company is to keep the founder entertained more than anything else.

There are a lot of companies like this (big & small), though sometimes its not recognisable from the outside. Note the goal is still ostensibly to make money. You don't run a business when you could have retired if you don't love growing businesses. I cant imagine a founder turning down an offer to expand rapidly, if it made sense. They just tend to avoiding going all in on a particular bet and for obvious reasons don't like ceeding control to outside investors.


>Isnt a "lifestyle" business a business to support the lifestyle of the founder? IE money is not typically a problem, either the company is profitable or the founder will support it loss making. The main function of the company is to keep the founder entertained more than anything else.

I don't think I've heard the phrase lifestyle business used that way. I'm not in the US let alone silicon valley so that might be relevant.

Rather I've heard lifestyle business used to describe a business, typically with zero to half a dozen employees, which the founder can run without putting in a whole bunch of time.

A real but deliberately vague example. A company that acts as an authorized dealer for a manufacturer. The sales company handles the sales process and takes orders through a website supplemented with phone calls. Actually shipping the merchandise and handling after sales customer support is done by the manufacturer. Why they don't want to do their own sales I don't know. Staffing requirements are one person to answer any phone calls and someone to do the books. Owner's required time is maybe a few hours a day.

Commissions on sales cover all the bills etc and let the owner pay themselves handsomely but it will never be a giant enterprise.


Reminds me of this talk from Vincent Woo (creator of Coderpad)

https://www.youtube.com/watch?v=J8UwcyYT3z0

Really made me rethink my priorities and has had me change the kinds of things I do.


Wow, he called the HelloSign acquisition in 2015. His other two suggestions (native search and messaging) are still in limbo.


>"lifestyle business" is really just a small business that works, is self-sustaining, and not overly bloated to attempt to make obscene amounts of $$$.

I guess it sounds too bourgeois for the young (and not so) SV rebels who are in to change the world and make some billions along the way.


He's talking about switching from vc rocketship to bootstrapped. In that context the pejorative makes sense: he's describing how he felt at the time.

Furthes, he ran this "lifestyle" business with outside investors.

He's written a nuanced, heartfelt essay, and this comment seems to have missed all of that to nitpick on a word.


>He's written a nuanced, heartfelt essay, and this comment seems to have missed all of that to nitpick on a word.

Hackers news comments in a sentence.


Agree the essay was a great read. I didn't see anything to suggest the OP missed that fact so much as had a reaction to a specific part of the essay and wished to discuss it.

Being a part of the SV startup ecosystem myself, I also see the term "lifestyle business" used as a soft-perjorative for "not ambitious enough".


That's exactly how OP was using it though, with full awareness. OP's mindset at the time was "I failed: I meant to start a billion dollar business, and I only have a crummy lifestyle business"

They now have come around and appreciate their success. Their use of "lifestyle business" was chosen to convey their own negative attitude at the time.

The comment I replied to totally missed that the author wasn't critcizing their own business! They just felt badly about it a few years ago. See the part of the comment where they praise gumroad.

A more self aware comment would have merely decried the prevailing VC attitude that led the founder to feel bad. Instead the commentor seems to think the founder needs cheering up and convincing.


I see your point. The admonishment to Sahil at the end to "stop using" the term "lifestyle business" does seem to miss Sahil's self-awareness of the internal conflict between knowing about the misuse of the term and yet still allowing it to affect him at one point in time.

It's refreshing to see this perspective from founders. It's a story not often told and does well to characterize the grinding rollercoaster of hard decisions you won't easily find in the sea of "A-co raised $40mm!" press releases.


I also found it illuminating how quickly the investors wanted to just dump the entire thing, which would have almost certainly left all the businesses in the lurch, like we see with so many companies these days, especially in the valley.

People seem to forget that the VCs are hidden from the blowback of those cut-and-run decisions, so it's easy for them to make those flippant recommendations. It is the executives who will be publicly shamed for cutting and running and that reputation will follow them and likely catch up to them.

Good on Sahil for sticking it through and getting out of the bubble and realizing that chasing money is not the path to happiness.


I think this comment is an unfair treatment of Sahil's opinion. He disclaimers all this at the start with the following:

> Now, it may look like I am in an enviable position, running a profitable, growing, and low-maintenance software business with customers who adore us. But for years, I considered myself a failure. At my lowest point, I had to lay off 75% of my company, including many of my best friends. I had failed.

> I no longer feel shame in the path I took to get to where I am today. It took me years to realize that I was misguided from the outset. This is that journey, from the beginning.

He acknowledges that he is grateful and proud of his lifestyle business. There's nothing wrong with the phrase itself. I run a lifestyle tech business as well. I'm proud of it. I switch between "small business", "sustainable long-term business" and "lifestyle business" depending on my audience. "lifestyle business" doesn't have to be a dirty word if you don't use it as one.


I also use Gumroad and also used to think lifestyle business is bad.

But really it just means “business that supports a lifestyle”. Which a “startup” does not.

In that light, startup is the bad word when you think about it. What, you run a business that can’t even support your lifestyle? LooooooL

And yes if I’ve learned anything about silicon valkey in the past 4 years of living here is that people are elitist as fuck, hate their lives, and grab onto any little thing to make themselves feel better than others. It’s what they need to endure the grind and that’s okay. I get it.


I like and use the term "Bootstrapped Business" -> smaller, tight focus on profitability, trying to meet real needs.


I agree and use it sometimes too but hearing "bootstrapped" applied to companies outside of tech doesn't feel right. Example: my dad owns a 20 person small business selling commercial doors and hardware - we are in the construction industry. Saying he has "bootstrapped the business" still feels weird.

That's when good old "small business" should be sufficient enough IMO. It has a stigma but it shouldn't.


Yeah, I mean I guess there are more qualifiers I didn't put in there with respect to tech: "Bootstrapped Software Business", "Bootstrapped SAAS", etc.


I agree 100%. I'm a big fan of just calling them businesses.


Isn't it just a VC term that has snuck into the vernacular? As builders and creators of value, we do ourselves a disservice by using the same language as that used by those who only deploy value - or more accurately who rent it out opportunistically - and have different values and priorities.


Worse than the use of the term lifestyle business is his definition of success. Success is his placement relative to other people who become billionaires. He describes this several times. That is vanity rather than any sort of imperative or objective goal describing a business position.

To me vanity is a major red flag. That sort of self serving quality needs to describe the founder as somebody willing to ask for cash and drive necessary growth, but must not be a goal driving the business. The difference is that the qualities (appearance) of vanity are attainable early.


Most people use the term to describe businesses that require little ongoing effort (hello, “4 hour work week”), but yeah, the implication that people who take vc money aren’t interested in a particular lifestyle is kinda hilarious.


Couldn't agree more.

The lack of business sense in the startup scene is absolutely astounding.

Too many opt for playing game of thrones instead of creating value and capturing some of that value as a profit.


> It doesn’t matter how amazing your product is, or how fast you ship features. The market you’re in will determine most of your growth. For better or worse, Gumroad grew at roughly the same rate almost every month because that’s how quickly the market determined we would grow.

This seems like a simplification, and perhaps overly fatalistic. A company's growth rate is a function with many parameters, and at most points, one parameter will be the limiting factor. An amazing product is (usually) a necessary, but not sufficient condition for rapid growth.

It sounds like Gumroad built a product that delighted their users, but there just wasn't a level of market demand to hit the growth numbers that they were hoping for. (Though I consider their end state a big success; being a unicorn isn't the only way to add value to your users' lives.)

In a different market, with enough pent up demand for the product, the story could have gone another way; "We kept on getting new users, but ultimately couldn't keep users because our product wasn't awesome enough."


Market determines your growth almost always. I have enough data points now to basically say this with enough certainty. Friendster is the countercase where the technology couldn't scale, and their execution was poor, and they focused on revenue at the expense of growth, but generally like... now-a-days with modern web stack market is basically all that matters.


Is your claim "for most companies the quality is already sufficient, and so it's not the limiting factor (even though it would be if the quality was insufficient)"? Or literally "the TAM matters, your app's quality doesn't"?


The prior. Now-a-days, the majority of developers can build a quality app since infrastructure and tooling (heroku etc) are widely available, that you can paper over most completely horrible / unacceptable experiences by limiting features early on. If you pick a huge market and have simply 1-2 compelling features, you can go from nothing to something within 90 days typically, and then use that to become unstoppable.


I'm not sure I agree that quality isn't a major driver of success.

Two counterpoints: - Shopify came in and dominated Magento and others via a much better quality product (later they built network effects with app store, but originally it was just an easier platform) - Slack came into a workplace communication space where there were (arguably) free alternatives in IRC and others and won with a better, simpler product.

I think product quality is extremely important in determining success. I think it was less important 10-15 years ago as the web was establishing itself, but today consumers expect a polished, feature-complete experience.


But then how do I sell my mvp startup newsletter to all the people not capable of actually building a quality product? /s

In all seriousness, it is comical how often people apply revisionist explanations for the rise of certain companies. Its simple really. Great product + big market. You must have both, no exceptions.


so s/determine most/constrain/


Precisely this. Seems like a small change, but I think it's a significant one.


Fair enough. I think I'd make this change if I could go back in time!


My experience with Kongregate was different, but I did feel some of the same things. We became a vehicle for many indie game creators to make a living, which I'm very proud of. In our case we also had a sale that was very profitable for the founders and early employees, and also profitable for our investors.

But the weird thing is that if our VC investors had known at the outset that they would have a 3x return on their money in three years, they probably wouldn't have made the investment. A 50% annual rate of return is not worth their time. That's not what their LPs are looking for.

The angels made more like 6.5x and put in less time - most of them would take that deal all day long. I'm an angel now, and I definitely would. So perhaps startups that need capital but aren't looking to be billion dollar companies should consider just raising a seed round from angels... The difficulty there is that angels do want an exit, not dividends from a profitable company that stays private forever.


I'm probably at the tail end of the generation that grew up with Flash games and I have to say Kongregate was great! I loved playing Warlords: Call to Arms. Thanks for your work.


> if our VC investors had known at the outset that they would have a 3x return on their money in three years, they probably wouldn't have made the investment.

Of course they would have made an investment.

Any guaranteed return above bank interest rate -- is appealing for investors.

Guaranteed return of 50%/year is an amazing investment opportunity.

What you probably meant is that if investors knew that the return cannot be more than 3x, but also has high probability of failure -- then the investors probably would not make the investment.


Look at it this way. A VC fund has a finite number of investments to make. Typically a partner gets to say yes once or twice a year. They usually take a board seat and spend lots of time helping the company.

Knowing that many of those investments will be worthless, they want to maximize the number of shots they get towards a billion dollar company.

If 1/3 of their companies are a 3x return, and the rest become worthless, the fund has failed. They’re all aiming for the one company that will deliver the big returns that offset all the failures (and the high fees they charge LPs.)

Seed stage investors are different. YC, for instance, spends much less time with each company, and therefore can take lots of shots.

Growth stage venture is different too. They aim to invest a few years before a company goes public, and are fine with a 3x-5x return. They are taking much less risk.

The VC model also creates a fundamental tension with the founder. Founders get one shot at a time. $50M exits represent life-changing money for them (as long as they didn’t raise too much money.) VCs pressure them to take greater risks than are rational for the founder. This is why you want to look for VCs that will truly put the founder first. Or keep control of your board.

Joel Spolsky explained this well 15 years ago, so we knew about it going in and chose a founder-first VC firm.

Here’s that post: https://www.joelonsoftware.com/2003/06/03/fixing-venture-cap...

Thoughtful VCs will do what’s right for the founder. It’s rational because their reputation matters so much when competing for investments. This has changed for the better since Joel’s post.


Thank you for making Kongregate, it was a huge part of my childhood!


> I’m an angel now

You actually label yourself that vs. an investor?


I think it’s common usage that investor is implied? I invest in tech companies at the seed stage.


I've always liked Gumroad as a product and service but this line kind of bothers me:

> There is, of course, the $178,000,000 we have sent to creators

This money wasn't sent to creators. They sold products worth $178M + Gumroad fees through the service. The creators made the products, marketed the products, acquired the customers, etc. When I use Paypal to sell something they aren't "sending me money".


> There is, of course, the $178,000,000 we have {sent, channelled, moved-through-our-platform, assisted in transferring} to creators

All of the above seem synonymous and none seems particularly malicious, but "sent" is easiest way to express it. For a marketplace, I don't think anyone's naive to believe the host is directly advancing funds to the tune of millions. Is it really necessary to nitpick that?


They should have said $178,000,000 in transactions.


"Enabled customers to achieve 178,000,000 in revenue they may not otherwise have," maybe?


That would be better, but I also agree with the others who think the way it was written pretty clearly meant the same thing, in the context of the article.


You could say the same thing about Uber, Lyft, Airbnb, Etsy, TaskRabbit, etc..

When you sit down and think about it you start to realize just how “temporary” all these so-called unicorns are, as they are just middleware services with no real differentiating benefits other than size and brand recognition and maybe some vague “guarantee” to the customer. You’ve got to get big fast, because what you actually do is easily replicated.


> no real differentiating benefits other than size and brand recognition and maybe some vague “guarantee” to the customer.

- scale

- brand

- customer loyalty

that's a lot of differentiation. more then 99% of the businesses in the world and more than even many public companies.

(especially once you add the power gained from aggregating demand and supply which most of these companies have)


Most of the businesses in the world make a widget and sell that widget.


Uber and Lyft are middlemen, but because they interface directly with the consumer, they also create demand. I deleted my apps when I realized that I was spending a hundred bucks a month compared with twenty bucks a month if I had used cabs, and getting little real benefit out of it. It just feels so convenient, but the fares add up quickly. I bet if they sent weekly or monthly summaries people would use them less.


>because what you actually do is easily replicated.

Not really for Lyft/Uber, at not now that it's flat fee and ride pooling instead of a traditional per minute/mile fee structure. To achieve those thing efficiently you need data and until you get that data you're burning through a lot of money.



Might be a language thing, but if someone sends me money through paypal, I definitely would say paypal receives the funds from that person and then sends them to me.

Thus paypal can tally up how much money they have sent to their customers. I can't see how you could misunderstand that or think there is malice in the formulation. I can't possibly anyone would sit there thinking that gumroad ment he donated money to people or invested it.


I struggle to see how this story is one of failure. A kid launched a business that is still going 8 years later. He learned that VC funding is a double edged sword and was able to shed some of that burden - buying them out for $1. In the beginning he speaks of building this thing and having it be his lifes work - which it may well be if he keeps going. And yet there was all this talk of being a billion dollar company and an IPO - which is actually as exit strategy. I was floored by the notion that only 20 percent monthly growth was a red flag. 'du fuk you people think you're doing? Launching a rocket? Oh right... SV, VC, etc...

In the end this guy learned a bunch of hard lessons about business, finance, and life. I hope he continues at least until he finds a new adventure, and stops calling it a failure. It may turn out to be exactly what he said he wanted in the beginning: "what I thought would be my life’s work."


I think it's simply a byproduct of silicon valley's fetishization of the word "failure". Anything that isn't a runaway success is re-contextualized as a "failure" so that it can function as blog title short hand for "here's what I learned from my experience that didn't go 100% as expected".


He "failed" to build a billion dollar company.


The most interesting thing about the setup premise, is that it should have a "yet" attached to it somewhere.

Unless something terrible has happened in the last few months, their recent November 2018 numbers indicate that at a continued reasonable rate of growth over another decade, they'll have a sizable business and a large number of creators utilizing it (which is one of his goals). It would be worth at least a hundred million dollars. If the growth spikes upward even a bit on average (maybe they garner more interest with scale or the market expands faster), it could get them to between a $500m and $1b valuation a decade out. Modest compounded growth with even a small kicker, from where they're already at, will produce a big outcome over time. So he'd be a sub 40 year old with an extremely valuable company and a lot of people that use what he created (and which I assume he owns a large part of at this juncture).

Given time and their history of slow but steady growth, Gum is more likely than not to produce a homerun. The continued growth over many years is a stellar signal that they're already winning as a business. You can get there slow or fast. The VCs want it fast, Sahil can afford to take his time, he's still quite young and Gum is his.


I wasn't interested in the emotional story behind this. But I did resonate with 1 line in particular here: "It doesn’t matter how amazing your product is, or how fast you ship features. The market you’re in will determine most of your growth."

This is so true, in my experience. You hit a roadblock in recurring revenue, not because your product doesn't have enough features, or your team sucks, but simply: your market is smaller than you thought.


Scaling to a billion dollar company in that market was certainly attainable. Patreon started two years after Gumroad and now look where they are. Gumroad had a movers first advantage - so I really disagree with the quote. Had they continued to push feature development and tweak PMF they could have been a billion dollar company.

Don't take that as a slight to Gumroad either. Building a profitable business from almost going under and now generating close to $1m in annual profits is an incredible feat. But I do disagree with the point that the market wasn't ready (as clearly demonstrated by the success of others).


Patreon and Gumroad were different businesses for most of their histories. Gumroad was always a place to sell stuff and launch subscription services. Patreon is trying to pivot that way now with all their talk of membership businesses, but no one who uses it seems to see it that way.

That's why everyone was up in arms about the fee change in 2017. People tossing $1 here and there to people they liked were the foundation of everything. Membership businesses generally start at $5 a month.

And Patreon isn't going to have much luck with it. There are so many better options if someone just wants to set up a membership business. Memberful, which they bought, wasn't even one of the better options. It doesn't even handle anything other than plans, payments, and integrations with services that do the heavy lifting.


Any examples of other business that do what you mention at the end? Just curious what the "better" options are. I like to keep abreast of the underdogs.


Gumroad is the only one I've used. Others popped up over the years, but I didn't think to keep notes.


>. Patreon started two years after Gumroad and now look where they are.

Two years away from buying back shares for $1 from their VCs?

There's this whole swath of the internet that can support thousands of small businesses that's being slashed and burned by VCs in search of a unicorn. Gumroad and Patreon are both perfect examples. They are both good ideas that are well executed. They are not, however, companies that can extract tens of millions to hundreds of millions in profit a year. They really should be 20-30 employee type companies making a steady couple of million in profit.


I agree. Some of the most successful companies became that way because they told us we "needed" their products, usually by clever marketing.


I always think of the market as ... all those shitty services and websites I absolutely hate / or just don't like ... that i still use because I want the service.

Arguably they failed to execute some of what they did (their actual app or site) very well, but it doesn't matter, they picked the right market because I can't stop using it even in the face of other things.


Give us some examples of what you're trying to do, maybe someone here will help you in the future.


This is weird because... I've noticed the opposite. Often markets are way bigger than you think; or rather, 1000 users for a product seems small but is actually quite a decent size depending on how much effort has been put in.

What it comes down to is being content that you will not always make a billion dollar product. With that in mind, a big market has many definitions. Maybe you should have paid attention to the emotional aspect.


The corollary is that you can shift the market you're in and increase growth.

Clickfunnels addresses a slightly different market and has 9 figures of recurring revenue. Partly because they charge a lot more and have a lot more bells and whistles, partly because they have way more intensive marketing, but partly because they're targeting the demographic that wants those bells and whistles over the simplicity of gumroad.


That's really more for market leaders. If someone stops by your site and starts comparing it to other businesses and their features, you're not likely to shift the market soon. Even if you do shift the market, you might not get the growth as your well-funded competitors copy your features. It'd have to be some ground-breaking technology that essentially propels you to market leader overnight.


Clickfunnels isn't particularly ground-breaking. I identified what I believe got them to their position.

In many cases, they're attracting customers who would never dream of using gumroad.


Jesus this part sucks:

"In those nine months, when the whole team knew that we were fighting for our company’s life, not a single person left Gumroad. From “this is gonna be hard,” to “yep, turns out it was,” every single person worked harder than ever."

Did everyone one of these people have significant equity in the company?

I'd expect people who love their jobs and who work on something crucial, such as researching new medicines or making more efficient batteries to want and be able to do this. No offense, but if this ultimatum was handed out and I wasn't vested like the top guys I'd bail.


Exactly what I was thinking when I read that part. I hope those people are still his best friends. Working long hours for 9 months and getting laid off at the end doesn't only affect you financially. It will will have a significant effect on your personal life and the people around you who may depend on you.


The author mentions hiring a lot of good friends, so I assume they did it because they believed in him and the mission.


This is exactly why I won't hire good friends. The personal relations would skew business sense then, on both sides in order to stay loyal to your friends. This skew can be dangerous for business, and thus for the well-being of those who are involved and bet on its success.


If gumroad became a billion dollar company you'd be retiring on that 9 months of work with even a tiny bit of equity. I bet there are plenty of people that bailed out of google, facebook or other similarly positioned startups at that stage and regret it.


This is the type of reasoning that startups use to justify making employees work 60+ hour weeks for a tiny amount of equity and below-market pay. Most startups will not become billion dollar companies.


You are both right.


I bet there are far more people who didn't leave similarly-positioned-but-unsuccessful startups and regret it... maybe spurred on by the survivorship bias (or non-survivorship bias, in this case) of those who left a successful startup.


Sounds like the story of a young person who drank the VC cool-aid. The company should have been bootstrapped from the get-go... $25k/mo office, …doh.

Yep, easy to say as a greybeard and hindsight. But I remember Joel on Software articles on this subject circa 2000, so some information was out there.

Between the lines I feel a lot of self-punishment going on. Well, I'd love to have $10k+ of "failure" coming in every month, with the satisfaction of helping the little guy/gal no less.

Perhaps you'd consider selling to someone who believes in the mission and hates dark patterns? I don't have a lot of capital laying around, but some, and perhaps something else could be arranged?


Grateful to read such a personal and detailed post. I had a startup that failed myself, back in the long ago, and in retrospect I'm glad that if failed quickly and cleanly. I admire this alternate path though of working your way to a new equilibrium.

The offer from KPCB to let you off the hook for the venture financing is amazing. Is that a common thing to happen? I get why they just wanted to write it off and be done with it, but it still seems like a generous outcome. An undo button!


On the one hand I applaud KPCB for giving up their interest in a founder friendly way, but this also leaves a bad taste in my mouth and seems a bit “Heads I win, Tails you lose” from Sahil’s pov. The VC investment let him build a fully fledged product capable of breaking out. But it didn’t and he still got to keep the company without much liquidation preference. This is an example of a true VC subsidy.


I wonder if an entrepreneur with less connections and not a part of YC would get that $1 buyout deal. I would think the default would be ousting the founder and selling the assets. Then the founder would be left with nothing. They'd have no lifestyle business, even though they could have had one if they never took VC.


If he only did a series A, I doubt he gave up enough control to get ousted.


Looking back, I’m glad we didn’t hit those numbers. If we doubled down, raised more money, and appeared in the headlines again, there was a very real possibility it would only lead to a more spectacular failure.

Hmmm, reading between the lines, you seem to have a point...


Ouch, number 2 employee at Pinterest - a $10 billion company that’s about to go public this year.

He probably would have been worth an easy 100-200 million.


I prefer not to do the math.


Your story speaks to my soul. I've never been too attracted to the VC-funded startup life (although I wouldn't pass it up if it was the correct move to grow my business), but reading about your commitment to your users through thick and thin gives me so much more respect for you, and that is a quality I hope to emulate someday.


I can't begin to imagine what that must feel like, but I gotta say, your kind of company (i.e. non-VC-funded, don't care about the unicorn status, just serve the customers well) is the kind I'd like to do one day. The vision and values just align with me so much more than hypergrowth and whatever it takes to get there. Many hats off to you for making all the decisions you did to keep your customers first. It may not be worth much, but you have my respect forever.


Hindsight is 20/20. A million different factors outside of your control could have led to different outcomes for both Pinterest and Gumroad. Thank you for sharing your story!


Many years ago, you once mentioned that anyone who wants to build a startup should read Hacker News. I'm still here because of you. You've made an impact!


Based on your article, you sound pretty bad ass by having gone through the journey. I'm doubtful you'd have that by staying. It's a pretty remarkable path, and I respect you for that!


for what it's worth I think you've created more value at Gumroad then you would have at Pintrest :)


Haha, sorry didn’t mean to rub it in brother.

But you’re still in an incredibly fortunate situation, and it’s all about the journey anyway.


But would you trade the amount of time spent at Pinterest before IPO with the experience you gained at Gumroad? Tough call, given the professional and personal growth you gained from it.


What's the big advantage of having 200m vs 15m or so?

It's fuck-you money either way.


If there a year at least vested one year of equity...?


Look on the bright side - maybe Pinterest would have failed if you stayed there.


It's crazy that you care about the money, being in your mid-20s with a company pulling in 60k USD net/month puts you squarely in the pretty much unlimited money category of the world.


"It's crazy that you care about the money..."

Did you read the article?


Pinterest is a malignant tumor on the face of the Web that exists to trick people who are trying to search for images. Being rich off that would be worse that toiling in obscurity.


People actually do use Pinterest to collect images, I think, but I agree with you on the other points


Uh - can you elaborate? I often search for images and sometimes from pinterest - but I don't find pinterest interfering with my searches when not using it.


The poster is likely referring to how Pinterest links now dominate Google image search results. Clicking on the Pinterest link takes you to the Pinterest website, and not the actual image source. Pinterest will often block you from viewing the page unless you sign in or create an account.


You are vastly overestimating what even an early employee (esp a jr one) gets at a unicorn. Not that it wouldn't be substantial today, but nothing close to 1-2% of the entire value of the company.


> You are vastly overestimating what even an early employee (esp a jr one) gets at a unicorn. Not that it wouldn't be substantial today, but nothing close to 1-2% of the entire value of the company.

Mmm...based on the valuation even 0.1% would equate to $10 million...not bad ;-)


you'd probably get around .1% as an early jr person. assuming a 4 year vest period, that .1% will have been diluted to maybe .05%, so assuming a $10b valuation it comes out to $5m. Still not bad, but a far cry from $200m.


crunchbase says pinterest has had 15 funding rounds. certainly they weren't all complete rounds and it would've been nice equity but nowhere near the nominal 1-2% early employees get.


If he stayed he might have ended up in an executive position, getting additional stock grants down the line.


fair enough


Reminds me of Noah Kagan. Employee #30, I think, at Facebook. That should be what - $200M+?


Probably a fraction of that. Dilution etc.

My guess is he’ll make more from Gumroad over the long run.


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Paraphrasing (probably Nietzsche):

"There are only 3 kinds of people: the poor that wants to be rich, the rich that wants to continue being rich and the idealist, that using his ideals wants to be rich."


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