Substack Halts Plans for Series C Funding
All is not well for Subscriptions
With an economy that might be souring with consumers pressed by inflation and dropping subscriptions (like Netflix or the hype of NFTs) and experiences that were so popular during the pandemic, in the Summer of 2022 people are out experiencing the world, and traveling and maybe not reading as much. That combined with a bear market in the stock market, Substack has realized it’s not the best time to raise more funds in May, 2022.
Substack Thinks It’s a Unicorn
According to the New York Times, Substack held discussions with potential investors in recent months about raising $75 million to $100 million to fund the growth of its business, where apparently the fund-raising discussions valued the company at between $750 million and $1 billion.
Substack however is a pandemic beneficiary that saw a surge in subscriptions and revenue when we were stuck indoors. Those other pandemic beneficiaries like Zoom and Peloton haven’t done so well after the pandemic lulled a bit.
In its early days, Substack primarily catered to a certain set of internet-savvy writers and journalists, let’s call them the Twitter elites. However Substack has a problem, as writers get more successful they literally “outgrow” the platform and don’t want to give the 10% cut that Substack requires of them.
Substack in the big picture however has seen tremendous growth. Substack launched in 2017 as a tool for starting paid email newsletters.
Within a year, the company had turned a mission to help writers reach audiences that value them into a platform with 25,000 paying subscribers. Substack, has raised at least $82.4 million over three rounds of funding, and even when many high-flying startups are freezing hiring or cutting jobs, it’s important to note they are hiring.
While subscription media is incredible, crypto is teetering on the brink of a Bitcoin price collapse that could herald another crypto winter, in which the “Creator Economy” is possibly tethered.
How Much Does Substack Actually Make?
In April, 2022 Substack has 30 million monthly visits. That’s just one fifth the traffic of Medium. Ghost and Every.to have both in the area of 500,000 monthly visits, just to give you a comparison between the scale of these things.
Substack has come a long ways in a short time, considering Medium was founded in 2012 and has failed many times to scale in any meaningful way. If Medium is known for its click-bait and is a content mill with an absurdly low cost per mile, Substack allows writers who have an existing community and Email list, a great way to monetize.
Anyways, but is Substack more profitable?
The investment terms under discussion for Substack would have represented a leap in the company’s valuation, but it may have to wait until more favorable circumstances.
Substack has told investors that it had revenue of about $9 million in 2021. This means technically its writers made $90 million in 2021 on its new media platform.
Substack, based in San Francisco, was most recently valued at $650 million after closing a $65 million Series B round in March, 2021. Given how stocks have corrected, this is in reality much less now in mid, 2022.
It’s a totally different environment as the pandemic bump that Substack was a true beneficiary of.
Substack jobs still has about 17 open roles that they are seeking to fill.
The Creator Elites
So this effectively means that the top 10 writers on Substack make about 20 to 25% of its entire revenue.
Substack has realized that focusing on its high-end creators is all that matters for high-octane growth. Features like the Newsletter recommendation product, mostly favored the Newsletters Substack features on its “leaderboards” on its home page. There is nothing wrong with this per se, it just reinforces what we already know about the Creator Economy.
Twitch Rules Live-Streaming in the West
As TikTok is opening up subscriptions for live-streaming, most analysts agree the top 2% of Creators benefit. The model for making tips and live-streaming work is Amazon owned Twitch, that is really killing it in 2022. Twitch had a fanatic emphasis of listening to their creators, community and users. That same thing that made Amazon’s “customer-centricity” so iconic.
Image Credit: Substack Jobs.
A Creator Economy Company in the Portfolio of Andreesen Horowitz
I speculate that mega-VC firms like Andreessen Horowitz (a16z) must have substantial influence on Substack’s direction.
The pyramid schemes found in crypto, and NFT platforms are not unlike what we are seeing with new Creator Economy platforms. In Web3 though most startups wouldn’t dream of taking 10% of the revenue of creators, but that’s nothing compared to the 30% of Web 2 platforms. Substack is first and foremost, a Silicon Valley company. It’s stayed true to its playbook of focusing on the big creators first and foremost.
Substack likely has in the area of 575,000 to 645,000 individuals who are paying readers to a Substack Newsletter in my opinion, though official numbers have not been released.
I think its number of serious Creators is fairly limited. This is because it caters to established journalists, celebrities, lifestyle writers and pop-culture writers like politics. Substack wants moreover to on-board established creators with a significant following. However it’s slowly starting to diversify its Creator base and even branching into niche content (food, comics, etc.…) and getting TikTok GenZ personalities to join.
The Pandemic Was a Boon for Substack’s Growth
With the pandemic’s momentum slowing down for readers, how will Substack’s growth be in the next period?
Substack’s growth during the pandemic was truly remarkable. This was truly an extraordinary time for the advent of Newsletters and subscription based media 2020-2022.
It’s highly doubtful 2022 or 2023 will be equally good climate for Subscription based platforms like 2020 and 2021 were given inflation and less discretionary spending. The churn of Substack super-stars is also a problem to maintain steady incredible growth rates.
When you are making nearly 25% of your revenue from your top 10, and one of them leaves, that’s quite a blow. Of course I am referring to the Dispatch, whose deal was always a bit special. The Dispatch is a serious journalism website who need to be indie and set-up for the 2024 elections.
In November, 2021 Substack that is headquartered in San Francisco’s Financial District, said it had surpassed a million paid subscriptions to Substack publications. That’s not the same thing as saying that it had one million paying subscribers. That number is likely to be far far less. Certainly a few people have multiple paid subscriptions.
Substack can be a bit fuzzy with the numbers. They used to tell Creators to expect paid subscriptions from between 5-10% of all readers (free subscribers). Many Creators on Substack never reach such conversion rates in reality, at least without a pre-existing community and direct relationship with their audiences which is usually founded on years of podcasting, journalism, literature (books) or even videos. A writer starting from scratch can expect more like a 2-3% conversion rate range.
Substack has no incentive therefore to cater to indie writers with no existing audience. If you are a nobody, you will indeed be on your own. Not only are they unlikely to grow their Newsletter, but with a conversation rate that’s lower than the stars, they are unlikely ever to be cash-cows for Substack itself. The amateur writers will for the most part stay on Medium, while more professional Creators will outgrow Substack or make their own platforms or websites like happened with Every.to.
So Substack is its own niche, an upper middle class Creator economy for writers and podcasters. Do call this class of Creators even part of a “Middle Class” is not really factual. It’s widely understood there is no real middle class in this game. Not bad!
Substack’s scalability is thus primarily driven by the big shots. Substack has not diversified its platform adoption, it’s a few top niche voices becoming incredibly profitable due to the dynamics of Substack’s leaderboards and magnified by Twitter. The lure of FOMO anyone? That’s product-market fit, but not at scale. There are of course outliers but they are rare. Many writers on Substack are just weekend warriors.
How much entertainment, education information flow is actually going on here? How much community commentary and comments? It really depends.
Trajectory of Monthly Views
Substack generated 24.57 million visits in September 2021, up from 18 million in April 2021. In May, 2022 there are 30.63 million visits. Clearly growth has slowed down in 2022 as you can see from the Simliarweb data. As monthly views increase, SEO will improve very gradually. It took Medium’s domain SEO a decade and a lot of spam to arrive at being the “SEO powerhouse” it is today. Google reinforces the web as clickbait.
Substack also have an iOS app now.
Though it varies they are currently ranked #20 in News. This is a success for a startup that only recently got its big break of the pandemic push. Previously they were in the “lifestyle” category. Important to point out it’s getting more downloads than Medium who is ranked #25.
It’s crazy to note that LinkedIn’s write button looks a lot like Substack’s logo for its Newsletters. See below:
Such a high valuation for a company with relatively small revenue was more common in the latter months of 2021. But for Substack to think it’s a Unicorn in 2023 will seem pretty intense in 2023. I would give it an intrinsic valuation of $300 million, if I am to be generous. That it’s so reliant on its top 10 and its top 100 Creators is not a great diversified model, since they do churn as we have seen in Substack’s short history pretty often.
Famous creators must immediately relinquish 13% of their profits, so go home with 87%, or only $87 for every $100 made. Fair enough, if Substack revenue is just part of your diversified revenue stream as a legit Creator.
Substack, which provides a platform on which writers can publish paid email newsletters and keep most of the revenue has successfully added Podcasting to its platform and has plans for video as well.
After my own personal survey I’d say there are only maybe around 1,000 to 2,000 high quality Newsletters on Substack. That’s also being quite generous, so competition in a niche can be rather low.
Newsletters at the Cult of Personality
Substack is thus relying primarily on the cult of personality for their revenue model. Some creators have found a formula like providing exclusive financial advice to professionals to rise to the top of the system.
With Bitcoin and the stock market likely in falling knife territory, that’s a lot of Substack’s revenue with it. This is because the top Creators with the most lucrative paid schemes are in finance, investing and crypto. Or they are providing financial or professional (like interview cheats) advice to a niche like Engineers or Product Managers.
Substack's best-known writers appear to be a revolving-door, many of whom thrive on controversy. If I were to tabulate the shelf-life of a star on Substack, I doubt the average would be much longer than 24 months. That’s not a long time to scale a business, or an indie media service.
The company has pitched itself as an alternative to established publishers of news articles, graphic novels and books. With podcasting, it really does complete the circle. People are more happy to pay for Podcasts than they are for writing, on the whole.
The New York Times, Axios, Vanity Fair, and the New Yorker seem particularly interested in covering Substack. As many of these businesses are doing Newsletters as well, the context is like a review from a competitor, more than serious journalism. The recent Vanity Fair article was more than exception rather than the rule.
According to the Times, Substack separately told investors that it saw revenue of just $9 million last year. With just “hundreds of thousands” of paying Subscribers, Substack faces real challenges to continue to scale at the cusp of an economic downturn that could impact Subscription growth. Hopefully with an Android version of its App, Substack can grow faster.
Once I reach 100 paid subscribers, Substack will tell others my Newsletter has “100s” of subscribers. That’s a Best case scenario of social proof. Silicon Valley loves to fudge numbers.
If Every.to is the elitism of clickbait, Substack is the elitism of celebrity journalism. Sadly Substack’s content does not appeal well to a male audience and in particular quite poorly to a young male audience. Those people on Twitch, Reddit, YouTube and TikTok are the future of media. After five years, Substack still has a lot to prove.
With around 45 employees, Substack should have at least about 70 by the end of 2022. While Newsletters are now everywhere, it’s unclear if Substack is even facing any actual competition form Newsletters such as Twitter (Revue), LinkedIn, Facebook (Bulletin) or the likes of The Atlantic and Puck. While several Medium writers have done well on Substack, even more Substack creators have left the platform. Substack’s main competition is the churn of its own writers who “outgrow” the platform.
Substack needs to do a lot more work to achieve product-market fit of scalability.
It’s unclear when Substack will be able to resume its intended (Series C) funding round.
Thanks for reading guys!