20VC Sahil Lavingia on Rolling Funds and Their Impact on The Future of Venture, How To Evaluate Market, Team and Product, The Value of Party Rounds & The Pros and Cons of MultiStage Funds Investing at Seed

Summary Notes


In the latest episode of "20 Minutes VC," host Harry Stebbings chats with Sahil Lavingia, CEO of Gumroad and pioneer of the rolling funds model on AngelList, about the evolution of venture funding and the impact of rolling funds. Sahil shares his journey from an early employee at Pinterest to founding Gumroad and experiencing the highs and lows of startup life, including raising significant venture capital and facing the challenges of a failed Series B round. He also discusses his recent venture into rolling funds, which democratizes investment and aligns with his values of transparency and accessibility. Additionally, Sahil and Harry touch on the importance of product focus, the role of investors, and the current state of venture capital valuations.

Summary Notes

Introduction to Rolling Funds and Sahil Lavingia's Journey

  • Rolling funds are gaining popularity and Sahil Lavingia is a prominent figure in this space.
  • Sahil is the founder and CEO of Gumroad, a platform that supports creators.
  • His rolling fund on AngelList is notable, with $6 million per year in commitments.
  • Sahil has invested in successful companies like Lambda School, Figma, HelloSign, and House.

"And one of the first and most prominent was raised by Sahil Lavingia. And so I'm delighted to welcome Sahil to the hot seat today to discuss the new fund."

The quote emphasizes Sahil's leading role in the emerging trend of rolling funds and sets the stage for a discussion about his fund and his broader experience in the startup and investment world.

Sahil's Background and Entry into Startups and Investing

  • Sahil's career began as an early employee at Pinterest and an app developer during the early days of the App Store.
  • His journey from making iPhone apps to joining Pinterest and eventually founding Gumroad illustrates a trajectory of entrepreneurial growth.
  • Sahil's experience at Pinterest, particularly in product focus, significantly influenced his approach to startups.
  • After facing challenges with Gumroad, including failing to raise a Series B and downsizing the company, Sahil moved to Utah and began sharing his experiences on Twitter.
  • His transparency and willingness to invest in black founders following the George Floyd protests led to the suggestion of starting a fund.

"I was the second employee there. Before that I was a freshman at USC. And before that I was in high school making iPhone apps."

This quote provides a brief backstory on Sahil's early involvement in the tech industry, highlighting his progression from a high school app developer to a key player at Pinterest and ultimately a startup founder and investor.

Sahil's Impact from Pinterest and Product Focus

  • Sahil's time at Pinterest taught him the importance of product focus and simplicity.
  • He learned the value of keeping a product simple and mission-driven, as well as hiring carefully.
  • These lessons informed his approach to building Gumroad and his investment philosophy.
  • Sahil's insights as an early employee at Pinterest also influenced his commitment to transparency and clarity in his own company.

"But the simple things, like the product focus, like the team back then was so product focused, and I just assumed it was normal."

The quote reflects on Sahil's realization that the intense product focus he experienced at Pinterest was not common in all companies, and it became a foundational aspect of his own business philosophy.

Testing for Product Focus in Founders

  • Sahil tests for product focus by using the products himself and evaluating whether they deliver on their promises.
  • He looks for signs that the founding team actively uses and cares about their product.
  • Small details in the user experience can indicate the level of care and attention founders give to their product.
  • Sahil believes that the founding team must be deeply invested in the product for it to succeed, as no one else will fix the small but crucial details.

"I can tell when products aren't being used by the founding team."

The quote signifies the importance Sahil places on founders using their own products, which he sees as a clear indicator of their commitment to and understanding of the user experience.

The Evolution of Product Standards

  • Sahil acknowledges that the bar for product quality has risen significantly, and early releases must be more polished than in the past.
  • While founders should always strive for improvement, Sahil believes the initial product offering should be close to perfect in the core user experience.
  • He discusses the balance between the embarrassment of early releases and the need for high-quality products in today's market.

"But the truth is, the bar for where your product needs to be today is so much higher."

This quote captures Sahil's perspective on the changing expectations for product quality in the startup industry and the necessity for founders to meet these higher standards.

Sahil's Relationship to Risk and Money

  • Sahil reflects on his decision to leave Pinterest without any stock vesting, acknowledging it was a costly choice.
  • He discusses his approach to risk, prioritizing interesting experiences and learning over financial security.
  • Sahil's desire to take on the challenges of starting and growing a company outweighed the potential financial gains from staying at Pinterest.

"I think I have one life and I want to spend it doing really interesting things, learning lots of stuff, working with really interesting people."

The quote highlights Sahil's philosophy on risk-taking and his preference for pursuing fulfilling and educational experiences over financial considerations.

Decision to Choose AngelList Rolling Fund

  • Sahil Lavingia did not initially intend to become a VC or have a fund.
  • He was attracted to the concept of a rolling fund due to its low activation energy.
  • Traditional funds require a set amount of capital and a time-consuming capital-raising process.
  • Rolling funds allowed Sahil to start with a small amount and grow over time.
  • Naval Ravikant's support as an anchor investor for Sahil's rolling fund was significant.
  • The rolling fund model aligns with Sahil's preference for transparency and using Twitter for public discourse.

"Yeah, the truth is I never really intended to be a VC or to have a fund. And there's this sort of concept of activation energy, and with a fund, you just have to pick a number, you have to sort of spend potentially weeks or months raising the capital."

Explanation: Sahil explains his initial disinterest in traditional VC funds due to the high activation energy required and his lack of intention to become a VC. This quote sets the stage for why he found the rolling fund model appealing.

"And when naval told me about rolling funds, it really just opened the door for me because I could start very, very low."

Explanation: Sahil credits Naval Ravikant for introducing him to the rolling fund concept, which allowed him to start with modest capital, aligning with his desire to begin small and scale up.

Impact of Rolling Funds on Venture Capital

  • Sahil believes in democratization and sees rolling funds as making VC more accessible.
  • He acknowledges the existence of a power law dynamic even in democratized systems.
  • Rolling funds are expected to have a significant impact on early-stage ventures.
  • Traditional venture firms are not threatened by rolling funds but may benefit from more companies reaching Series A and B stages.
  • The diversity and reach of rolling funds can lead to a variety of companies being funded.

"I really believe in those tenants, and I think you're right. I think it is a little bit of a 1% game."

Explanation: Sahil agrees with the notion that rolling funds may initially benefit a small percentage of individuals but also emphasizes his belief in democratization within the VC industry.

"But what you're going to see is all of these companies that might have failed, that were able to raise 100k here, 250k there, from these new emerging fund managers."

Explanation: Sahil highlights the potential of rolling funds to support companies that might otherwise fail, due to the availability of funds from new managers with different networks and LP bases.

Perception of Early-Stage Valuation

  • Sahil sees the entire early-stage system as undervalued despite high valuations for select companies.
  • He believes that more startups should be launched, which would increase competition and potentially lead to more moderate valuations.
  • Sahil advocates for free markets and competition, which he believes will benefit all stakeholders in the VC ecosystem.
  • He predicts that increasing the number of quality startups will exert downward pressure on Series A pricing.

"I think it's undervalied as a system, right. So you're seeing a few of these deals that get super hot and these YC companies that raise at these 15 $20 million caps."

Explanation: Sahil contends that while some deals are highly valued, the broader early-stage ecosystem is undervalued, suggesting room for growth and more startups.

"I believe more competition is generally a good thing. And I think that this is just creating more competition, which is going to be better for the customer."

Explanation: Sahil expresses his belief in the benefits of competition, which rolling funds introduce to the VC market, improving outcomes for all participants.

Price Sensitivity and Investment Decisions

  • Sahil empathizes with founders, having been one himself, and understands their perspective when raising funds.
  • He believes founders should raise as much capital as they can, within reason.
  • Sahil suggests that the solution to price sensitivity is to increase the number of participants in the VC market.
  • He compares the valuation of startups to the fluctuating perceptions of bitcoin and Tesla, indicating that some of today's high valuations may seem reasonable in hindsight.

"Ultimately, look, investors like to say that you should raise less money, you should be sort of really careful as a founder, and hire sort of really efficiently and be capital efficient, et cetera."

Explanation: Sahil discusses the conventional wisdom among investors about capital efficiency but points out that founders face consistent dilution regardless of the amount raised.

"So for some of them, they're going to look like great deals in hindsight. I remember stripe in 2009, I believe, raised their seed round and it was two on 20 and this was 2009."

Explanation: Sahil reflects on past investment examples like Stripe to illustrate how some investments that seem expensive at the time can turn out to be excellent deals in retrospect.

The Art of Declining Investment Opportunities

  • Sahil shares the difficulty of providing feedback when passing on investment opportunities.
  • He uses a standard polite response to decline opportunities and believes that detailed feedback can lead to inauthenticity or misdirection.
  • Sahil plans to create a document outlining general reasons for passing on deals to help founders understand without personalizing the feedback.
  • He encourages founders to seek feedback from their personal network before approaching VCs.

"What I've done so far is to say, hey, thanks for the time, it's not a fit for me right now. Thanks, Sahil."

Explanation: Sahil describes his method of politely declining investment opportunities without providing specific reasons, which he finds challenging to articulate.

"You should really have a group of people that you're getting feedback and iterating sort of on their feedback first before you go to vcs."

Explanation: Sahil advises founders to rely on their personal networks for candid feedback, rather than expecting it from VCs who may not have the incentive to provide detailed reasons for their investment decisions.

Value Equation in Startups

  • Sahil Lavingia presents a simple mathematical formula for startup value: value equals market times people.
  • Both a large market and a highly qualified team are essential for a startup's success.
  • The absence of either a viable market or talented people results in a value of zero.

"I think the simple one is value equals market times people. And if one of those is a zero, it's not worth it, right?"

This quote encapsulates Sahil's belief that both market potential and the right team are critical to creating value in a startup. Without one, the startup's value proposition fails.

Time Horizon Differences between VCs and Founders

  • Sahil highlights the differing time horizons of venture capitalists (VCs) and founders.
  • VCs often require a quick return on investment due to their focus on internal rate of return (IRR).
  • Founders may be content with a longer journey to success, as the eventual financial gain can be life-changing over a significant portion of their lives.
  • The venture community may undervalue patience and the potential for macroeconomic shifts to impact a startup's trajectory.

"But as a founder, look, if I make $50 million and it takes me nine years or ten years or 15 years, look, I'm going to be alive for a lot longer than that."

Sahil emphasizes the personal perspective of a founder, who may value the eventual outcome over the time it takes to achieve it, contrary to the time-sensitive nature of VC investments.

The Emotional Toll of Startup Failures

  • Sahil shares the emotional impact of being written off by a major investor and the subsequent challenges.
  • The feeling of wasted effort and public failure is intense for founders.
  • Recovery from such setbacks can require physical distance, community support, and a shift in personal identity beyond the company.
  • Sahil emphasizes the importance of surrounding oneself with people who prioritize personal well-being over business success.

"It was brutal. I mean, I put all my eggs in one basket... it certainly feels like that. And it's a public failure."

This quote reveals the personal hardship Sahil experienced when his startup faced significant challenges and the perception of failure within the industry.

Dealing with Expectations and Pressure

  • Sahil and the host discuss the pressures of living up to expectations in the venture world.
  • Sahil advises on the importance of patience and the realization that most people are primarily concerned with their own lives.
  • He encourages a healthy perspective on relationships in business, focusing on functional rather than emotional connections.
  • Sahil finds empowerment in knowing he doesn't owe anyone anything beyond professional commitments.

"I think there are two things that really helped me. One is an emphasis on patience... And then the other one, honestly, is people don't really give a shit about you."

Sahil's advice to the host reflects his belief that patience and a realistic view of other people's concerns can alleviate the pressure of expectations.

Multistage Money Entering Seed Funding

  • Sahil advises founders to focus on building their company rather than relying too heavily on investor support.
  • He suggests that founders prioritize terms and valuation during fundraising and then return to their primary role of company building.
  • Sahil expresses a preference for early-stage investors who are actively involved in operations over career investors who may lack recent hands-on experience.

"Understand that it's your job to build this company, and investors might say they're going to do a lot for you... but in general, they're not going to save the company if it's going to fail and they're not going to kill the company if it's going to succeed."

Sahil underscores the primary responsibility of founders to drive their company's success, with investors playing a supportive but not decisive role.

The Rise of Preemptive Rounds

  • Sahil comments on the aggressive nature of preemptive rounds in venture capital.
  • He acknowledges that venture capital firms need to secure wins with high-potential startups early on to ensure substantial returns.
  • Sahil sees the competitive landscape as a challenge for investors like himself who operate at a different scale.

"Firms are really trying to make sure that they find those companies early. They're willing to have a portion of their fund on sort of option calls per se."

This quote describes the strategic approach of VC firms to invest early in promising startups, treating initial investments like option calls for future involvement.

Party Rounds and Cap Table Strategy

  • Sahil is a proponent of party rounds, where a startup raises funds from a diverse group of investors rather than a few large stakeholders.
  • He believes having a broad coalition of supporters can be beneficial and may prevent any single investor from feeling overly entitled.
  • Sahil advises against relying on investors to rescue a struggling startup, as business decisions will ultimately prevail.

"I'm a fan, honestly... Why would you want a group of amazing people on your cap table?"

Sahil endorses the idea of party rounds as a way to gather a strong support network of individuals who can contribute to a startup's success without exerting undue influence.

Financial Incentive Alignment

  • Raising money from founders via a party round is a strategy to align financial incentives.
  • Financial performance is crucial; if a company is not performing, securing further investment becomes challenging.

"And raising money from a bunch of founders via party round, or whatever you may call it, is a good way to do that, to kind of get that financial incentive alignment going."

This quote emphasizes the strategy of using a party round to align the financial interests of investors with the company's success.

"And the truth is, if you're not performing bluntly, they're not going to do your a anyway."

This quote underlines the harsh reality that without good performance, investors are unlikely to continue investing.

Signaling Risk and Investor Alignment

  • Signaling risk is a concern but is overshadowed by company performance.
  • Seed firms and investors are aligned in optimizing for the best price in the next funding round.
  • Multi-stage funds may have conflicting interests regarding pricing in future rounds due to their desire to increase ownership.

"Signaling risk. Like people talk about signaling risk a lot, but ultimately you're right. If you're not performing, it's going to be brutal."

This quote acknowledges signaling risk but suggests that company performance is ultimately more influential on future investment.

"If you're a multi stage fund or a larger fund in early, you don't want a price optimized for the next round because you want to put a bigger check in."

The quote discusses the potential conflict of interest for multi-stage funds when it comes to pricing in subsequent funding rounds.

Transparency and Relationship with VCs

  • Clearing one's head after investing simplifies relationships and allows focus on helping the company build.
  • Multi-stage VCs are continuously in a sales process, which can complicate relationships and discussions.
  • Trust and open communication are essential in the investor-founder relationship.

"I want to write a check into a company, and then I'm done with the sales process."

This quote reflects the desire for a straightforward and transparent relationship with the company after investing.

"That ongoing sales process... means that you can't have quite so open and free discussions."

The quote highlights how continual sales efforts by VCs can hinder open dialogue on sensitive company issues.

Personal Brand and Distribution

  • Brand is seen as a lagging indicator of one's character and actions.
  • Being public and communicative can accelerate the establishment of a personal brand.
  • Providing value to the audience is critical when building a personal brand.

"Brand is sort of a lagging indicator of who you are."

This quote suggests that brand reputation follows from one's actions and character over time.

"I just want my brand to be, I genuinely want to help people."

The quote reflects a desire for a brand that is synonymous with genuine assistance and value.

Optimism and Influences

  • Nonfiction and fiction books provide different types of inspiration and optimism about the future.
  • Influential board members, like Michael Abbott, offer trust and support during challenging times.
  • Confidence and self-belief are seen as strengths, while speaking prematurely is acknowledged as a weakness.

"I love how to win friends and influence people."

The quote reveals a book that has significantly impacted the speaker's self-awareness and interpersonal skills.

"Michael Abbott was on our board at Gumroad. He was awesome."

This quote highlights the positive influence and support of a memorable board member.

Venture Capital and Rolling Funds

  • The goal is to make venture capital more open and innovative.
  • Rolling funds are a new experiment in the venture capital industry.
  • There is a desire for venture capital to innovate more frequently.

"I just want to make venture more open."

The quote expresses a desire to increase transparency and accessibility in the venture capital industry.

"I'm just excited to see change. I'm excited to see experiments."

This quote shows enthusiasm for innovation and experimentation within venture capital through new concepts like rolling funds.

Success and Identity

  • Bill Gates is admired for his achievements and his ability to redefine his identity beyond Microsoft.
  • Success includes the ability to be one's own person, independent of one's business achievements.

"Bill Gates has been a hero of mine for a long time."

The quote indicates admiration for Bill Gates, not just for his business success, but also for his personal growth and identity.

Investment Decisions

  • Clubhouse is a recent investment chosen for its founder-product fit and the founder's long-term vision for audio.
  • Investment decisions are influenced by traction, scale, and the founder's passion for the product.

"Clubhouse is probably the most recently announced one."

This quote introduces the most recent investment and suggests excitement for the product and its potential impact on the internet era.

Venture Capital's Role and Future

  • Venture capital should be a catalyst for innovation, not just an investor in innovators.
  • There is a need for the venture capital industry to self-innovate and improve.

"The truth is, look like venture capital doesn't innovate that often."

The quote critiques the venture capital industry for its infrequency of innovation, suggesting a need for self-improvement within the sector.

Defining Success

  • Success is associated with individuals who have made significant contributions and then redefined their lives, like Bill Gates.
  • The ability to detach one's identity from their business achievements is seen as an important aspect of success.

"Like Bill Gates has been a hero of mine for a long time."

The quote reflects on Bill Gates as a model for success, not just in business but in personal transformation and identity.

Future Aspirations and Contributions

  • The aspiration is to contribute to the venture capital industry's growth and improvement.
  • Experimentation with new funding structures like rolling funds is part of this contribution.

"And I like the idea that I contributed a little bit to sort of making the industry think, oh, maybe the ways that we currently think about how we've set things up might not be perfect."

This quote expresses the speaker's hope that their contributions will inspire the venture capital industry to reevaluate and improve its practices.

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