Nan Wang
Questions
- From the infrastructure providers’ perspective, what is the process of acquiring creators?
- Who's doing well in this domain?
- How would you assess the strengths of engagement between creators and the platforms?
- In terms of revenue growth, Gumroad cohort GMV shows that new creators each year generate approx. 25% more revenue in the first six months than the previous cohort did in their first six month. How would you contextualise this positive trend in terms of the engagement and traction?
- Looking at Gumroad financials, it is really interesting to see how their COGS has compressed from originally 200% of revenue in 2012 or 2013 to now 65% of revenue. In other words, the gross margin of the company has increased from negative to 35%. Just wondering what do you think goes into these cost of goods sold?
- Some marketing expenses are classified as fixed costs, rather than something related specifically to bring the next customer in. What marketing expense would the platforms include in COGS?
- In terms of the video hosting costs, does it also scale up and down with the number of creators on the platform?
- Got it. How big is the R&D, e.g. fixing the bugs, adding new features, as a percentage of revenue?
- Because Gumroad has so many beginner creators, at some point, these creators may want to switch to other platforms, maybe because they get better economics by paying a fixed monthly fee, where do the Gumroad customers creators switch to?
- Gumroad is going to introduce their own online courses. So they have the complete offer of digital downloads, membership and online courses. Do you think that would be enough to reduce some of this churn or if not, what can Gumroad do to mitigate some of the churn?
- In terms of creators growing out of Gumroad, is that in both economics terms as well as product offering terms?
- One thing I was thinking about… because Gumroad is going to raise from the creators in March. So say if some of these high earning creators are going to invest in Gumroad, then I have this hypothesis that because they're going to become the shareholders of Gumroad, so whether they're making money from selling their products online, paying Gumroad the transaction fee or helping Gumroads to generate GMV by educating/helping beginner creators, getting more revenue, increase the enterprise value, and they have capital appreciation from their investment into Gumroad. My hypothesis is that some people will take a more owner-operator mindset in looking at Gumroad in a fresh light. What do you think about this way of thinking?
- Switching gears to thinking about the lack of the middle-class in the creator economy right now, the data points very severely in that direction. So say 1% of the creators earn above $1 million per year, whereas 93% of the creators earn below 6,000 a year, which is not sustainable. How would you think about which platform has a better chance to build a more vibrant middle class?
- If we think about the big platforms, so YouTube, TikTok, Instagram, where some creators have a presence, I looked at the economics for YouTuber, it is much lower in comparison to if creators cultivate their audience and have a more direct relationship and higher price points where they can monetize. Please help me to understand what the dynamic is between big platforms and the infrastructure providers like Gumroad. To me, they're all serving the creator economy. The economics from the creator's perspective is so different, but why are there still so many creators on YouTube and Instagram?
- Lastly, Gumroad has an open, decentralized operating model. For example, they don't have full-time employees at the moment. They also want to open source everything, including the software stack. What do you think about the execution risk from this?
Interview
From the infrastructure providers’ perspective, what is the process of acquiring creators?
Guest: By far the biggest source of new customers for any of these platforms is going to be existing customers, the people who see products that are hosted on Gumroad, on Podia, on Teachable and Kajabi and Thinkific. They like the experience, or maybe not even have anything to do with liking the experience, but it's the software they know. They see that somebody that they respect is using this platform.
It's very powerful social proof. When that person gets to the point where they want to sell some kind of digital product, the first thing they think about is: okay, well, I saw that one person selling a book on Gumroad or I saw that one person selling a course on Podia or a membership on a Patreon. So I'm going to use that too.
It's a very powerful force because what will often happen is for groups of creators who all follow the same people, who all participate in the same discussions on social media, very often what will happen is one creator begins using a product and then another creator begins using that same product and then three or four or five or six more creators in that same circle begin using that product.
So even though that group of creators might be a tiny part of the entire creator economy, to somebody within that circle, it feels like an echo chamber. It feels like everybody's using Gumroad or Podia or Teachable or something. So for that, people just want to use what everybody else is using.
These platforms will acquire a lot of new customers that way.
A lot of platforms will go further too. They'll use affiliate commissions. So they'll give creators a percentage of sales if creators refer other creators to the platform.
Who's doing well in this domain?
Guest: I would say, Gumroad is doing well because of its sheer volume. Gumroad is very good for beginner creators because of the cost structure. Therefore, they just have this mass volume of creators.
So when people ask a question on social media: Hey, what should I use to host my e-book? More people are going to be using Gumroad than anything. They have an advantage there.
In general, I would say companies like Podia, Kajabi, Teachable are doing extremely well with affiliate marketing.
Without going into specifics, I'll give you one example of how powerful affiliates can be.
Platforms have a small handful of affiliates who are responsible for the overwhelming majority of their affiliate income. It's so powerful that one platform has an affiliate who drives so much business for them. In order to get this person to become an affiliate for this platform, they offered them a guarantee of $10,000 a month in commission.
So if they don't earn $10,000 a month in actual referral commission. The company will pay them that $10,000 because to them it's so valuable to have this person who is widely respected in the creator economy, aligning with their brand and going out on their podcast and going out on their blog and say: this is the platform that I use.
Those kinds of relationships are very common in this industry.
How would you assess the strengths of engagement between creators and the platforms?
Guest: The easy way to assess the strength is to look at revenue numbers that affiliate brings in, and the retention of that cohort, because a lot of times some affiliates are extremely focused on beginner creators. Maybe they teach beginner creators how to start a business.
One of the big challenges with beginner creators is that the churn rate on those is extremely high. The platforms might sign up a lot of creators, but those creators then churn within six months or four months or three months.
In terms of revenue growth, Gumroad cohort GMV shows that new creators each year generate approx. 25% more revenue in the first six months than the previous cohort did in their first six month. How would you contextualise this positive trend in terms of the engagement and traction?
Guest: Yeah. I think we'll continue to see that trend. I mean, of course 2020 is an outlier, so I'm not sure 2021 will be much higher. I think normalized over maybe a 10 year period over this next decade, we'll continue to see new creators get more and more successful.
And I think there are a lot of reasons for that. The biggest reason for that is the market is getting accustomed to paying for digital products. This is something that might have been new and novel five years ago, three years ago, even two years ago. Most people haven't been paying for Substack subscriptions and online courses and memberships and various digital products.
But I think that in five years, when asking what digital products do you pay monthly for? Will it be a lot like asking, do you subscribe to Netflix or HBO? Your digital product stack will be just as normal as what streaming services you subscribed to.
Looking at Gumroad financials, it is really interesting to see how their COGS has compressed from originally 200% of revenue in 2012 or 2013 to now 65% of revenue. In other words, the gross margin of the company has increased from negative to 35%. Just wondering what do you think goes into these cost of goods sold?
Guest: Without having their numbers in front of me, I'd be curious what their spending on in 2012, 2013, because they were fundamentally a different company back then. They were burning a lot of venture dollars and they were probably overspending on marketing.
I think Sahil has talked about this in previous blog posts. There was a lot of pressure on the company to spend. I think their COGS may have been artificially inflated more than it needed to be.
In terms of costs as the company grows, I think it's very common for companies like this to see far greater efficiency at scale. The biggest reason for that is, unlike most businesses where your customer acquisition is being driven by spent and performance marketing, fundamentally the biggest driver of acquisition for all of these creator economy companies, it's going to be existing users. So that's not an expenditure that increases the biggest.
The biggest COGS are going to be hosting for these companies. It'll be service delivery. It's going to be video hosting, which is extremely expensive relative to a lot of other expenses. There is also email hosting, which is a fraction of video hosting. Then it'll be web hosting like files and things like that.
So for Gumroad it would be video hosting and file hosting.
You can get some efficiency in video hosting as you grow, but not a lot. Certainly you can renegotiate your offers, renegotiate your contracts with Wistia.
Teachable and Podia use Wistia. I believe Kajabi also uses Wistia for their video hosting. There are other companies such as CloudFlare, even some startups that are trying to solve this video hosting expense problem, but ultimately that's, that's a huge part of COGS.
The other big part of cost for a lot of these companies, and this is actually one place where I believe Gumroad has a big advantage. I don't know if Gumroad has a paid affiliate program, if they don't, then that's a big cost advantage for them because the typical market rate for affiliate commissions in this industry is generally 30% of lifetime customer value. If you refer a customer, and they pay X dollars a month, then the marketer will receive 30% of X dollars. The platforms are going to give the person who referred the new customer 30% of that X dollars for the lifetime of that customer. As you can imagine, that massively increases COGS.
Most companies are happy to have a program like this because you were feeding into that eventual word of mouth growth. The more people you can get on the platform, the more efficient all of the spend gets.
It’s probably a customer acquisition cost that would be unacceptable in most industries, certainly in B2B, certainly in sales driven industries. However, in this industry, the whole point is to create more word of mouth. So the business becomes more and more capital efficient. It's a cost that almost everybody right now is happy to bear.
I think that's a place where Gumroad has an advantage because they're not a subscription service. I think if they do have an affiliate program, I think it's far less expensive for them to run.
Some marketing expenses are classified as fixed costs, rather than something related specifically to bring the next customer in. What marketing expense would the platforms include in COGS?
Guest: Some platforms separate affiliate fees from the rest of marketing expenses. So when companies spend on ad words on Facebook, those are outside of COGS, but the affiliate fees can be classified as a cost of revenue, because the platform knows it’s going to pay it per customer.
In terms of the video hosting costs, does it also scale up and down with the number of creators on the platform?
Guest: Yes, it definitely does. The agreements will differ based on the vendor, but in general, you are paying a fee for the total bandwidth of videos that are hosted on the platform. So if you think about that cumulatively, the larger you get, those videos don't get deleted, the higher your video hosting cost will be.
They also charge per watched. It's usually fractions of a penny, but ultimately it adds up a lot. Based on how many videos you have on the platform and based on how actively those videos are being watched, your costs will scale up or down.
Got it. How big is the R&D, e.g. fixing the bugs, adding new features, as a percentage of revenue?
Guest: Around 20% of revenue. It's almost entirely on upkeep and building new features. And I would say, that cost is one that for a product as complex as Gumroad where you have to fix a lot of things break when you're dealing with payments, email and video and those types of things. Those costs will certainly have to scale up as you grow.
Because Gumroad has so many beginner creators, at some point, these creators may want to switch to other platforms, maybe because they get better economics by paying a fixed monthly fee, where do the Gumroad customers creators switch to?
Guest: They will switch to Kajabi, Podia, Teachable, Thinkific. Generally we see people switching from selling a digital download, to selling a larger product, like a course or a membership. And that's why they switched to platforms like that.
However, if they're just looking to continue selling digital downloads, often they'll also look at Squarespace. Squarespace has their own checkout integration. If you're just selling some eBooks or some downloads, that's a very compelling proposition for a lot of creators to switch from Gumroad, which is taking a large percentage of their fees to a self-hosted platform.
Of course there are other headaches that come along with that, but many creators find that it's the economics are better and it's worth the headache.
Wix has their own checkout. Also, WordPress, there are a lot of WordPress plug-ins. That'll handle checkout for you. Now, many of them will take some sort of transaction fee, but what many creators end up doing if their business is simple and they're selling one or two products is they'll just hook Stripe or PayPal directly into their website and they end up paying a lot less money.
Gumroad is going to introduce their own online courses. So they have the complete offer of digital downloads, membership and online courses. Do you think that would be enough to reduce some of this churn or if not, what can Gumroad do to mitigate some of the churn?
Guest: I think it can partially reduce some of their churn. I think that a lot of their churn is likely to last because creators are growing out of the platform and more because creators aren't being successful on the platform. And so adding online courses won't fix that for them, because if a creator is not successful selling an e-book or a digital download, which is a far simpler product than an online course, then, offering a more complex product type is not going to make them more successful.
Their first membership product is extremely rudimentary. I would say it's not anything close to other membership platforms on the market.
I would expect that their first online course iteration will be similar to that. I think there's a chance that as they invest into development and continue to make these features more robust, I would say there's certainly a chance that they can make a serious dent in churn.
But I think that it's probably some ways off for it to be a meaningful number.
In terms of creators growing out of Gumroad, is that in both economics terms as well as product offering terms?
Guest: Exactly. Either the economics begin to make no sense for the creator or they're limited by the types of products they can sell.
One thing I was thinking about… because Gumroad is going to raise from the creators in March. So say if some of these high earning creators are going to invest in Gumroad, then I have this hypothesis that because they're going to become the shareholders of Gumroad, so whether they're making money from selling their products online, paying Gumroad the transaction fee or helping Gumroads to generate GMV by educating/helping beginner creators, getting more revenue, increase the enterprise value, and they have capital appreciation from their investment into Gumroad. My hypothesis is that some people will take a more owner-operator mindset in looking at Gumroad in a fresh light. What do you think about this way of thinking?
Guest: I think certainly it could play out that way. I think it's an extremely clever strategy.
I think it's very interesting and certainly gives creators some skin in the game. It can change how they behave and change how they think about the economics of being on Gumroad versus being on other platforms. Because certainly if I'm a shareholder in a company I'm far more likely to overlook faults or overlook things that might be less than how I want them, in favor of supporting that company and increasing value for myself as a shareholder.
My concern would be that the people who speak publicly or speak privately about being interested in investing in Gumroad are generally already pretty ardent supporters of Gumroad. Some people have been on their top 10 highest star creators list. Some people have been vocal proponents of Sahil and Gumroad.
So I'm not certain where the overlap is of creators, who like Gumroad, but might switch and creators who are interested in investing in this round.
Of course, that could change in the future. Of course, they could raise a lot more money in subsequent rounds and capture a lot more creators who might be on the fence. Right now, my hunch is that they are essential, not preaching to the choir, but raising money from the choir.
I'm not sure if that's going to make a fundamental difference in how those people think about their business on Gumroad, however, I think certainly what you're describing could play out if they're able to capture creators outside of that circle and get those folks to invest.
Switching gears to thinking about the lack of the middle-class in the creator economy right now, the data points very severely in that direction. So say 1% of the creators earn above $1 million per year, whereas 93% of the creators earn below 6,000 a year, which is not sustainable. How would you think about which platform has a better chance to build a more vibrant middle class?
Guest: I think to create a vibrant middle-class, it may not be the platform that solves this problem, but I think it will be an ecosystem that solves this problem.
You saw this with commerce and DTC brands where Shopify won the game, but there are competitors, for example, big commerce has a $4 billion market cap.
So I think the reason that a big middle-class was created in DTC and e-commerce is not because of the work of a single platform. Shopify certainly led the change. But also because of the ecosystem of 5,000 other companies that popped up to solve logistics, and all of these other stumbling blocks to getting in on the ground floor.
I think that for the creator economy, we need vendors who come in to solve problems, like help new creators get health insurance for themselves and their families or healthcare for themselves and their families, help new creators now who are working from home, with childcare.
So how to solve all of these problems that are abstracted away when you have a job?
And once those problems are solved. That middle-class is going to be empowered because those are problems that are very strongly put downward pressure on the ability of a creator middle-class to flourish. Those are essentially breakers for many people.
If you want to earn, $45,000 or $50,000 and putting in the time to do so would mean giving up healthcare for your family, or, would mean not being able to pay for property taxes in the city where you want to live for your kids to go to school, those are going to be massive disadvantages.
So I think that as the ecosystem grows as vendors pop up to offer these types of solutions, the creator middle-class will finally be able to rise and flourish. I think that's just a function of time.
We are already seeing companies pop up that are trying to solve problems like this, and that's going to be platform agnostic.
If we think about the big platforms, so YouTube, TikTok, Instagram, where some creators have a presence, I looked at the economics for YouTuber, it is much lower in comparison to if creators cultivate their audience and have a more direct relationship and higher price points where they can monetize. Please help me to understand what the dynamic is between big platforms and the infrastructure providers like Gumroad. To me, they're all serving the creator economy. The economics from the creator's perspective is so different, but why are there still so many creators on YouTube and Instagram?
Guest: That's a very good and important question to think about. You've seen the economics for YouTube creators get raked over selling directly to their audience.
When you look at the numbers that you can earn on YouTube ads, I think that there are a few things that keep creators on YouTube. Number one, I think just from a behavioral psychology standpoint, we're all guilty of not always making decisions in our best interest. That's part of it.
The other pieces of it, there are still brands that are willing to pay for sponsorships on YouTube channels and brands that are willing to pay for people to publish posts on Instagram, about their products.
I think that the creators will continue to have presences there. I don't think that brands will want to stop sponsorships and buying sponsored posts from people on social media. But I do think that that space will get increasingly crowded. It's already very crowded. It's going to get even more crowded.
I think many creators just haven't been exposed to the idea or to the possibility of selling directly to your customer. So they're content to rent an audience from Instagram or YouTube or TikTok, rather than build their own.
I think over time what's going to happen is people will see YouTube and Instagram and TikTok and whatever platform emerges after that, I think people will see those as marketing channels. The way that we see radio and billboards now, or even to an extent email, but I think email is a much more powerful marketing channel.
I think creators will see social media as a way to funnel people into their email list so that they can market their paid products to them. Right now, we're already seeing that shift and people wanting to own their relationship with their audience rather than rent it from a large platform.
But I think over time, it'll be a lot more accepted to run your business in a way where YouTube, Instagram, TikTok and Snapchat, these all live way at the top of the funnel for you. Then you nurture your audience through that funnel and down to a place where they are eventually on your email list where you can own that room.
Lastly, Gumroad has an open, decentralized operating model. For example, they don't have full-time employees at the moment. They also want to open source everything, including the software stack. What do you think about the execution risk from this?
Guest: I think that Gumroad has an extremely high amount of momentum and they have an extremely high amount of inertia, right? Because of that base of creators who have been using them for so long. For that reason, it's unlikely they'll ever not grow. Or at least it's unlikely that the company will ever see negative growth. I don't think the company will shrink.
I think we're in the very, very, very early stages of the creator economy. I think a company that's being treated as a side project will end up performing the way you would expect a side project to perform, or at least be limited in the way that you would expect a side project to be limited.
We hear a lot from former customers of Gumroad about the slow rate of change, the slow rate of development, the bugs, etc. So I think that the way that they run their company, for a very long time, will be a very successful lifestyle business for Sahil. I think it'll continue to be a very, very successful lifestyle business.
But, I think in 10 years, when you look at the ecosystem of creator economy companies, I find it hard to believe that if they continue running the business, in that way, it'll grow at the same pace as the economy.
The reality is when your head of product works, 10 hours a week or 20 hours a week, or when your head of development works no more than 20 hours a week, I think it's very challenging to build a company that keeps pace with the market's growth.
Now, with that said, I don't know, maybe the goal is not to keep pace with the market growth. And I think there many companies that operate in a slow cadence and print money.
I think Basecamp is kind of the classic example of this, of a company that prioritizes work-life balance and has built a pretty successful company that does very well, but they're certainly not one of the top three biggest project management tools out there.
It depends on the goal. And so if the goal is to win the ecosystem, I don't think Gumroad is acting in a way that puts on pace to do that. But if their goal is to build a very successful lifestyle business, I think certainly they have what it takes.
I think it'll be interesting to see if Gumroad can maintain that growth. I think if you look at comparable companies in the space, maybe a company like ConvertKit, which grew 150% in year two, and then 50% in year three and then 27% in year four. I think something like 30% in year five, I think 40 to 60% is going to be very difficult to maintain over 10 years. Teachable year two grew 110% and then 52% and then 44%. And they have a hundred plus full-time employees working on growing this company. I think 40 - 60% growth is very ambitious for 10 years.
I think 2020 is a perfect year to price the creator economy company. If you're looking to raise money.
Disclaimers
This transcript is for information purposes only and does not constitute advice of any type or trade recommendation and should not form the basis of any investment decision. Sacra accepts no liability for the transcript or for any errors, omissions or inaccuracies in respect of it. The views of the experts expressed in the transcript are those of the experts and they are not endorsed by, nor do they represent the opinion of Sacra. Sacra reserves all copyright, intellectual property rights in the transcript. Any modification, copying, displaying, distributing, transmitting, publishing, licensing, creating derivative works from, or selling any transcript is strictly prohibited.
