Friday, May 20, 2022

Sahil Lavingia - Investing $15m/yr into startups

From leaving Pinterest as its 2nd employee (now valued at $15B), to raising from the best investors in Silicon Valley, to going viral when he “failed to build a $1B company”, to investing $15M per year into startups - this is Sahil Lavingia

Sahil Lavingia

CEO at Gumroad and GP investing $15m/yr

Explore This Expert Session:

  • Meet Sahil Lavingia 👋 : From leaving Pinterest as its 2nd employee (now valued at $15B), to raising from the best investors in Silicon Valley, to going viral when he “failed to build a $1B company”, to investing $15M per year into startups - this is Sahil Lavingia
  • Investor Toolkit 🧰 : Sahil doesn’t believe in fundamentals, he has a singular focus this one thing
  • Personal Investing 💰 : The best CEO’s are the best capital allocators
  • New Markets Research 🔬: AI Driven Customer Support

History & Facts: 

Early life - It begins with a dream and a plan 💻 : Sahil Lavingia is a self-taught coder who found a love for development in middle school. He wanted to be an entrepreneur from a young age and even had a plan to get there. Go to college, work for a large tech company, work for a startup, and start his own business. Fortunately, things didn’t entirely turn out that way.

2009 - Finding Success as a College Dropout 🎓: The Appstore launches, and Sahil begins building app after app to sell. His philosophy was “solve a problem for yourself,” and he became successful in selling his apps. Suddenly, his career trajectory didn’t seem necessary, and he dropped out of college to pursue development.

Sahil Lavingia

2010 - A Career Launches 🚀: He gained enough notoriety and experience to be hired by Cold Brew Labs as the second employee for their rapidly growing startup called Pinterest. At only 18 years old, he joined as a co-founder and received .75% equity. Sahil learned from his time with Pinterest watching it double in active users every month, but he still wanted to start something for himself. After a year with the company, he left, a decision that cost him tens of millions of dollars (Pinterest is now valued at $12B). Years later, Sahil reflected on his decision to leave saying he wouldn’t trade the experience, and he doesn’t regret leaving before his shares vested.

Cold Brew Labs - 2010

2011 to 2012 - Gumroad takes off 💰: Sahil comes up with the idea for a self-publishing digital marketplace called Gumroad. The inspiration fell right in line with his philosophy by solving his own problem of not being able to quickly or conveniently sell one of his creations (a pencil icon) directly to customers. Coming hot off a successful stint at Pinterest, he felt he was on his way to building the next $1B unicorn. The funding came fast and furious. Sahil even commented that raising capital for Gumroad was easy. Everyone wanted in including names like Chris Sacca, Max Levkin, Naval Ravikant and Josh Kopelman. - May 2011

It wasn’t just individuals, though. Funds like First Round Capital, SV Angel, and Kliener Perkins were banging down the door. Gumroad receives more than $8 million in two rounds of funding and seems to be well on its way, but Sahil has to learn a lesson that many first-time entrepreneurs go through.

2015 - Disaster strikes at Gumroad 💥: Despite nearly constant growth from the company, Gumroad’s burn rate catches up with them. By 2014, the company stalled, and they needed to turn things around in a hurry. Sahil and his team knew it was crunch time and worked hard to launch new features at breakneck speed, but it wasn’t enough. Looking back, he now sees that every month with less than 20% growth should have been a red flag.

Gumroad’s general upward trajectory wasn’t enough

Sahil has to make a hard decision: close, sell, or lay off employees. He chose the latter and laid off 15 of his 20 employees. 

Leading up to the layoffs in June of 2015, Gumroad’s financials looked something like this:

Revenue: $89,000 for the month

Gross profit: $17,000

Operating expenses: $364,000

Net profit: -$351,000

A year later, in June 2016, our monthly numbers looked like this:

Revenue: $176,000 for the month

Gross profit: $42,000

Operating expenses: $32,000

Net profit: +$10,000

The decision includes friends who helped build Gumroad from nothing, but as he would recall later, he’s glad he had to make such a tough choice. Carrying on the way they were may have lead to an even more spectacular fail down the road. News travels fast.

2016 Is Sahil a lost cause❓: Gumroad is in a dark place. Investors lose faith leading to one of the country’s top VCs, Kleiner Perkins, to write the company off and give Sahil their equity back.  While laying off 75% of his staff was a difficult choice, the layoffs proved fruitful. Sahil brought the company back from the brink, and they were turning a profit in under a year. But the startup life was taking its toll.

2017 A change of scenery 🌄: Sahil leaves San Francisco for a change of environment. Going to what is arguably the polar opposite, he lands in Provo, Utah. In a 2017 post, he describes the move as transformative, and it allows him to pursue other ventures like writing and painting.

A Sahil Lavingia Original Painting

2019 Reflecting on My Failure to Make Gumroad a Billion Dollar Company 💡: Sahil shares his story and experiences with Gumroad and the invaluable lessons he’s learned. His story strikes a chord and goes viral in the tech community. His essay about his experience with Gumroad is read by more than 1 million people. Still under 30, Sahil has gone through more career developments than many do in a lifetime. He uses his story to inspire others and builds a Twitter following of over 280k people today.

Justin Mikolay - Commenting on Sahil Lavingias Failure to Build a Billion Dollar Company

2020 Sahil teams up with AngelList to launch a rolling fund 😇: Having previous invested as an entrepreneur, Sahil is motivated to launch his own fund. Maintaining a rolling fund allows him to keep a diverse group, which he prioritizes. Sahil is investing more than $15MM each year specifically into early-stage startups. His group includes heavy hitters like Arlan Hamilton, Josh Kopelman, and even AngelList founder Naval Ravikant.

2021 Focusing on the important things 📚: With Gumroad hitting on all cylinders and several other investments to his name, Sahil releases “The Minimalist Entrepreneur: How Great Founders Do More With Less.”

Investor Toolkit 🧰 :

Sahil has a singular goal - to invest in as many top performing startups as possible. 
He has a unique advantage in that he sees interesting companies before anyone else - his interests and profession happen to align with being early on certain technologies. Because of this, he can meet with the founders and get the inside scoop before the rest of the world even knows they exist. 

Thats how he met the SF-based payments startup Stripe and why he invested in Tesla at a $2B valuation. 

As Sahil says, 

Sahil referenced a well known Silicon Valley Venture Capitalist, Mike Moritz, stating -  “my job is to meet one person per year that is building the next Stripe (valued at $95B+), Uber (valued at $46B+), or Facebook (valued at $527B).”

In 2004, when Facebook raised their see round, the only thing that determined whether or not you had one of the top performing funds, was if you managed to invest in Facebook. Accel became the best fund in the world that year ONLY because of their investment in Facebook. 

Sahil lives by this strategy - he overindexes on investing into startups because he has a singular focus on meeting that one founder per year that is building the next big thing.  

Personal Investing 💰 :

Over the past 9 years, Sahil has returned over 15x his money in startups. The best part? That doesn’t include companies that haven’t exited yet. 

How did he does this? 

Because he believes the best startup CEO’s are the best capital allocators and invests 90%+ of his liquid assets back into startups. 

Sahil believes he has access to the top 1% of startups, and his returns show it. Because of this, he “effectively lives paycheck to paycheck”. Anytime his bank balance goes above a certain number, he will invest it into startups, crypto, or a fund.

New Market Watch: AI Driven Customer Support

Sahil is the CEO of Gumroad, a self-publishing marketplace to sell digital services such as books, memberships, courses and other digital services. He spends $20,000+ per month on Customer Support and would gladly pay $100,000 per year for a service to help him automate it.

If you’ve ever used your PC or smartphone to buy anything online, then you are a part of the $26.7 Trillion e-commerce economy. As of 2021, there are roughly 24 Million online stores across the globe, roughly 60% of which are fueled by SaaS giants like Shopify and BigCommerce

Superior customer service that can make or break your entire business. In 86% of cases, good customer service turns one-time clients into long-term brand champions. SaaS Capital says the median percent of annual recurring revenue (ARR) spent on customer support and customer success varies between 10%-14% and these numbers are steadily increasing. 

For a medium-sized startup (with an average $10M ARR), the costs of in-house customer support can surpass $1M per year, including the salaries & benefits of a 5-people team, the software & hardware costs. Now imagine competing in a global marketplace with asynchronous communication across many different time zones requiring service users 24/7, sometimes in several different languages. 

In 2021 alone, Uber’s ops. and support costs reached $1.9B. Outsourcing the customer support services can cut the costs in half if contracting workforce from developing countries in Asia and Eastern Europe but even then, the annual costs of maintaining a team of customer support assistance can reach >$500K for the same mid-size startup. 

With human-powered solutions proving to be cost-inefficient and unscalable (and also prone to human error), automated support is becoming increasingly popular. There has been a wave of companies innovating with automated solutions - chatbots, virtual product tours, pop-up checklists, interactive voice responses are all examples of self-service solutions. 

As an online shopper, you surely have at least once spoken to an AI powered assistant and if you’re “lucky” enough, you might have also encountered a similar scenario: 

Source: Boxmode

In fact, this is one of the still existing disadvantages of automated customer services - the loss of personal touch when dealing with a more complex task. You could still get the answer to your question, but it would cost you your time and frustration making it far less than a perfect solution.

The good news is that automation technology is improving by leaps and bounds every year. And while the market is still maturing to fully absorb all the benefits of “inhumanly human” solutions, VCs and Angel Investors are in search for the next company to win in this booming market. 

Here’s a few companies to watch in the space:

  1. Super-integratable AI CS provider Netomi that just closed its Series B round at a $210M valuation works in an area known as conversational artificial intelligence, which aims to use natural-language processing to help chatbots and virtual assistants handle complex requests while sounding as human-like as possible.
  2. At a $107M valuation, Glia is a digital customer service provider connecting online retailers with customers through voice, video, and collaborative browsing.
  3. California based Ushur automates service workflows in both the backend process and conversational interfaces using AI and no-code solutions. The $42M company closed its Series B round earlier in 2021 and is planning on doubling its number of Fortune 500 clients.

Be sure to listen to the interview with Sahil above!