Substack's new fundraising pitch
Venture capitalists wouldn't give the company the terms it wanted. Its writers might
Today, let’s talk about Substack’s latest idea for raising money — and how we should think of the company’s planned community round in relation to its larger ambitions. (See my ethics disclosure about Substack.)
When last we talked about the finances of the platform that hosts Platformer, it was also in the context of fundraising. Last May, the company sought to raise between $75 million and $100 million in a Series C round that could have valued it at up to $1 billion. Investors were skeptical, though, and Substack ultimately called it off.
At the time, I wrote that this was likely a good thing. A lower valuation meant the company would be under less pressure to financialize every aspect of the platform, and having less money in the bank could enforce a kind of discipline that can be useful for young product organizations.
Plus, I argued, Substack was still proving out its core thesis: that it could attract a critical mass of paid subscribers that would justify its previous reported valuation of $650 million. Given that it takes just 10 percent of creators’ revenue — a fraction of what rivals like YouTube and TikTok take — Substack had its work cut out for it. A month after cutting off fundraising talks, it laid off 13 of its 90 employees.
Ten months later, the company still has a hard road ahead of it. It also has a new idea for fundraising — asking writers on the platform to contribute, in exchange for a small amount of equity. Here’s Gerry Smith at Bloomberg:
The San Francisco-based company is letting its authors put in as little as $100 for shares. Co-founders Chris Best, Hamish McKenzie, and Jairaj Sethi said in a blog post Tuesday that recent regulatory changes allow businesses to tap more money from less-wealthy investors, a move they see as advantageous to the company.
“We’re doing this because the dynamics of a platform like Substack change if the people who are building their businesses on it are owners of it, too,” they said.
The company is using a platform called WeFunder to allow unaccredited investors to buy a piece of Substack, and so far it looks like a success: Less than 12 hours after launch, investors had committed almost $3.9 million, and seems on track to raise the legally allowed community fundraising limit of $5 million.
How we will ultimately think about this deal depends entirely on what becomes of Substack as a platform. In a world where the company grows into its series B valuation of $650 million, and either goes public or is sold for significantly more than that price, everyone who invested today will likely feel great about themselves.
The math still feels hard, though. Assuming the company is worth a low multiple of its revenues, it would need to generate billions of dollars in annual subscription sales for its 10 percent rake to justify even its current valuation. And it’s not there yet: per the company’s WeFunder page, Substack paid out about $300 million to writers in total since being founded in 2017.
At The Verge, Liz Lopatto says this makes the company look “desperate.” Using Substack’s publicly reported data, she estimates that the company generated around $18.6 million in revenue in 2022, or about double what it did the year before. But she laments that the company didn’t disclose other financial information before asking writers to invest. “It’s a way to make money, I suppose,” she writes about the fundraise. “But it doesn’t strike me as a good omen for Substack’s longevity.”
Eric Newcomer, on the other hand, found the pitch appealing — and kicked in $5,000. Newcomer, who publishes his newsletter on startups and venture capital on Substack, wrote that his newsletter’s own rapid growth contributed to his decision to invest. Newcomer went from zero to 50,000 free subscribers in two years, and last year generated $310,000 in revenue — a princely sum for a reporter.
Newcomer said he was betting on the company’s momentum. “While the fundraising environment is tough for startups, Substack has felt like it’s on a tear lately” he wrote. “It’s released chat, podcast and video features, an app, and a recommendation system.”
It seems unlikely — but not impossible — that Substack would have launched a community round had it closed that Series C on its desired terms last year. The moribund audio platform Clubhouse, which pulled off one of the great Silicon Valley magic tricks of all time when it somehow got Andreessen Horowitz to invest in it at a $4 billion valuation in 2021, sure isn’t launching a WeFunder page. Substack has capital needs that Clubhouse won’t have for a while.
At the same time, I believe Best when he tells Newcomer that the community round is effectively a goodwill gesture — a way to signal that the company is more serious than the other platforms who boast constantly of their desire to serve creators while also siphoning 30 percent or more of their revenue. A $100 investment in Substack today isn’t going to make anyone rich. But it’s a good signal of what the company actually values.
I’m not investing in Substack, for reasons both editorial and financial. On the editorial side, owning a piece of the company feels like it would be mixing business and journalism in a way that makes me uncomfortable. If I’m going to write about platforms without fear or favor, I don’t want to have a direct financial stake in any of them, however small.
And on the commercial side, even if I did want to invest in Substack, I wouldn’t do it on these terms. The company priced itself at its previous high, but hasn’t yet disclosed its revenue or rationale. And if I’ve learned one thing about startup investing from having read TechCrunch for so long, it’s that you want to invest in a media company before Andreessen Horowitz jacks up the price beyond all reason.
Had Substack wanted to put its money where its mouth is just a bit here, maybe the company could have paired its high-priced equity with some free advisory shares in the company. In this way, it could have kept its desired valuation while effectively lowering the price to invest for writers by giving them bonus equity in exchange for their contributions.
Instead, it offered the community the same price that Series B investors got: $26.2871 per share. That seems steep to me, but startup investing often is. I just hope writers take Best’s advice, and not invest any money they can’t afford to lose.
For Substack, though, it strikes me as a canny move. It’s about to get $5 million in fresh capital, at last year’s price, at a time when few startups of its size can say the same. The question, as ever, is whether it will be enough for the company to become sustainable. But at least now it has a bit more runway with which it can attempt to take off.
Correction: This post has been updated to reflect that Substack’s community fundraise values the company at its Series B valuation, $650 million, and not at a discount.
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Governing
Google is asking a US judge to dismiss the DOJ’s antitrust lawsuit against it, arguing the case ignores the company’s biggest rivals in the online ads space. Can the government define its market narrowly enough to persuade a judge? (Emily Birnbaum / Bloomberg)
Meta allowed users in Sri Lanka to violate its rules and solicit drugs on Facebook in order to fight an ongoing medical supply crisis, using a little-known loophole known as the “spirit of the policy” allowance. A good luck at the complexity of content moderation. (Andrew Deck and Zinara Rathnayake / Rest of World)
Apple illegally fired six labor activists in retaliation for organizing activity, according to the Communications Workers of America. (Lauren Kaori Gurley / Washington Post)
The UK abandoned its plans to launch a government-backed NFT. (Helen Catt and Sam Francis / BBC)
Industry
Microsoft released a dedicated GPT-4 AI assistant for cybersecurity professionals. The pace of the company’s product releases lately continue to impress. (Tom Warren / The Verge)
Elon Musk said Twitter will only recommend tweets from verified users on the For You page starting April 15. Hilarious and potentially catastrophic. (Mitchell Clark and Jay Peters / The Verge)
Meta is lowering bonuses for employees who “met most expectations” in their 2023 year-end reviews. (Salvador Rodriguez / Wall Street Journal)
Disney eliminated its metaverse division as part of a broader restructuring that is expected to reduce head count by around 7,000. (Robbie Whelan and Joe Flint / Wall Street Journal)
Roblox released two new generative AI tools, paving the way for a new wave of game design that could have big implications for the metaverse. (Scott Stein / CNET)
Europol warns criminals are already using ChatGPT to commit crimes. (Katyanna Quach / The Register)
Snap’s head of growth Jacob Andreou is leaving after eight years to join Greylock as a general partner. (Sarah Perez / TechCrunch)
Amazon opened Amazon Sidewalk, its low-power, wide-area network, for anyone to build connected gadgets on. (Jennifer Pattison Tuohy / The Verge)
Uber Eats is taking down thousands of virtual brands out of concern that the platform is getting clogged by restaurants listing multiple delivery options with different names but the same menu. (Preetika Rana and Heather Haddon / Wall Street Journal)
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Agreed on the Substack analysis. They were able to play this card once, considering the valuation is much higher than the current expected valuation. I do not think they can play this card twice, as other attempts at raising this way turn into low-yield pledge drives.
"Japan's antitrust watchdog closed its review of Microsoft’s acquisition of Activision Blizzard, saying it didn’t think the deal would not stifle competition. (Reuters)"
Shouldn't that be, "saying it didn’t think the deal would stifle competition," without the "not"?