Social-Media Payments Are Tricky, but Gumroad Hopes Its Model Sticks

Payments and social media have had a rocky relationship. Many companies that have tried to blend the two have failed or been forced to change their business model. Gumroad Inc., a startup founded by a 20-year-old veteran of Pinterest, says it gets it right.

"Selling stuff is far too difficult, as every other piece of being a merchant gets easier," says Sahil Lavingia, designer, founder and CEO of Gumroad.

Gumroad creates product pages for digital goods, though it doesn't host full e-commerce storefronts. Instead, it provides a short link for each product, and merchants then post this link on Twitter and Facebook. The system is suited for selling items such as music tracks, and many musicians use the service today.

Gumroad charges 5% on the total sale, plus takes 25 cents on each transaction. In comparison, PayPal charges 2.9% on the total sale and takes 30 cents per transaction. Gumroad does not charge extra to create the product pages for each item sold. Gumroad credits sales to customers' PayPal accounts each Friday if the merchant has earned more than $10 that week.

"Gumroad's innovation seems to be in social marketing – they have found an elegant way to help sellers with a large social following market directly to their followers," says Gil Luria, an analyst at Wedbush Securities, in an email. "This seems especially suited for digital goods such as music that do not require a web page to display the item."

Lavingia dropped out of the University of Southern California to become one of the founding members of Pinterest. An inventor by trade, his newest creation Gumroad started as a three-man team in February of 2012. Lavingia now has seven people working on the project.

Last summer, Greg Gillis, also known as the DJ Girl Talk, integrated Gumroad on his site so fans could purchase tracks and CDs. Wiz Khalifa uses Gumroad to sell music videos and David Banner, a Mississippi-native and rapper, recently used Gumroad for a donation campaign. Banner asked his fans to send $1 each for access to a new album and film. Coldplay also uses Gumroad, says Lavingia.

For small merchants, the Gumroad system allows users to market items to their connections on Facebook and Twitter without relying on a traditional e-commerce site.

Social media is dangerous territory for payments companies. Chirpify, which lets users purchase items by replying to tweets, is one of the few companies that's still in the game. Others, such as Twitpay, Twippr and Swipely, have had to either shut down or drastically change their approach.

Gumroad allows consumers to store their payment card details for future purchases. If they use Gumroad to purchase a digital good, consumers are sent an email with a link to download the good.

"They present an interesting development for e-commerce, but do not appear to be a payment disruptor," Luria says.

Mashable names Gumroad one of eight startups to watch in 2013. Lavingia's company raised $1.1 million after four days of working on the prototype, which launched in February. Gumroad soon after received a $7 million Series A investment by Kleiner Perkins Caufield & Byers.