You Should Be Worried About Substack

Reading Time: 5 minutes
Jenny Slate in the TV show Parks & Rec saying "money please" to her father

On Tuesday, newsletter subscription platform Substack announced that they were opening a community investment round via WeFunder with a target of raising $2 million from their writers, users, and fans. The commitments quickly blew past that number and Substack now has pledges of over $6.6 million, well over the legal limit of $5 million for crowdfunding. The crowdfund is technically an extension of their $65 million Series B led by Andreessen Horowitz in 2021, and is selling the same Series B Preferred Stock from that raise. This will bring Substack’s total amount raised from their seed round onward to $87 million assuming they take the full $5 million allowed through the WeFunder arrangement.

If you’re squinting at those numbers (seeking $2 million? from writers? huh?) feeling something is off, you’re right: why does Substack, after raising $65 million in venture capital in 2021, need your pocket change?

Well, it’s because the professional investors wouldn’t give it to them.

Substack tried to put together a raise of $75 million to $100 million in spring 2022 according to The New York Times, but decided not to move forward as the tech economy started to, ya know, crash. They were also apparently seeking an increase in their valuation with that raise, which presumably was a sticking point with investors since tech valuations were significantly down in 2022.

I’m on the record as hating Substack’s business model, and the information we have so far seems to support my opinion. The company has processed $300 million in newsletter subscription payments for the authors on their platform. This sounds good until you realize that the $300 million number is cumulative over the lifetime of the business,1 that Substack’s portion of that subscription revenue is 10%, and that many of the top earners on the platform were paid by Substack to be there.

This puts, in the best case scenario, Substack at a lifetime revenue of $30 million over the course of 5 years. The number of paid subscriptions has doubled since 2021, and is sitting at around 2 million, so it’s likely that most of that revenue is recent and that revenue is growing. However, only 2 million out of their 35 million active subscriptions are paying, and since for writers the platform fees only kick in when they set-up subscriptions, there is an inventive to never do so. Literally, why would I give Substack 10% if I don’t have to?2 Competitors such as Ghost, Beehiiv, ConvertKit and even good ol’ WordPress make it easy to do the same thing at a flat rate. The only other major player using a percentage model is Patreon, and things are definitely going fine there. Definitely fine.

All of this raises a huge red flag to me: how fast is Substack spending that trying to raise $2 million was worth the effort after failing to get together a proper round in 2022?

Too fast is my guess. But it’s only a guess.

If you’re at all familiar with venture funding and investing in businesses, you may be squinting again: why, if Substack is raising a community round, don’t we know much money they’re making? And their burn rate? And how long their cash-on-hand will last?

Great question, person I made up in my head!

Because Substack hasn’t told us.

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The WeFunder model is interesting. There are legal caps on investment amounts, and normies who are not accredited investors and don’t have a income or net worth over $124,0003 can invest up to $2,500. It’s a cool idea. It’s…democratizing…shareholder capitalism? Ok. Sure. There is an argument to be made for that.

But the model is interesting too in that the process Substack is currently going through is more like a Kickstarter pledge than an actual raise. At this point, investors have pressed a button saying they want in, but the amounts are not confirmed. This is important, because it’s how Substack is getting around releasing their financials.

On the WeFunder page, the Substack Team has been responding to the reasonable request for any financial information at all with the following: “When we file our paperwork with the SEC (estimated in the next 1 – 2 weeks), we’ll include two years of audited financial statements. If you place a reservation now, you’ll be asked to confirm it at that time – so you can make a final decision on whether to invest after you’ve seen those financial statements.”

I kind of get it. It costs money to put together that information properly. The reports have to be audited and presented in the way that the SEC desires. So the idea here is that Substack can get pledges in advance and know if it’s worth it to move forward before getting all of the details together.

But, does their target investor for this crowdfund, their writers and subscribers, know what kind of access to Substack’s financial information they should have in order to make an informed investment decision?

Maybe not. The entire presentation of this offer is cloaked in an appropriation of community that suggests that the writers scraping by on $5/month subscriptions are on the same team as the founders who have raised over $80 million dollars for their software.4

It’s absurd to the point of being predatory to present an investment offer with so little context to an audience that is notoriously underpaid and unlikely to have the industry knowledge to discern whether or not this is a good idea.

First of all, there is no planned liquidity event. Of course I assume Substack will go public or get acquired if they don’t run out of cash first, but the timeline isn’t clear, and the Substack team is purposefully vague about their plans.

There’s also the issue of the valuation itself. This is a little above my paygrade, but Substack is essentially saying that their business is worth as much as it was in the 2021 Series B, which was at the top of the market and simply no longer true. Adam Ryan from Workweek who seems to know what he’s talking about5 agrees, writing: “Substack is extending its runway by making fans and “normal” people pay on a multiple that doesn’t exist in today’s market but what their investors paid at 2 years ago. It’ll turn out poorly, specifically when people learn what liquidation preference means and that they paid for a business that might be worth 40% of that valuation.”

There are other ways for writers to have power, which is one of the purported goals for Substack of this raise. I’m thinking…unions. I’m thinking…co-ops.6 I’m thinking…government funding for the arts. I’m at the very least thinking that writers need to have control over their platforms in a more meaningful way than whatever this mess is.

I am not thinking that an overvalued investment in what may be a failing tech start-up is what writers need. If Substack releases their audited financials in a couple of weeks, we’ll know more. But until then, I’m going to embrace my cynical side and assume that any start-up that wants this small amount of cash at this valuation is in big trouble, and that the writers who depend on this platform for their income are the ones who will get screwed.

  1. the graphics on their WeFunder page are also showing cumulative revenue and are particularly egregious

  2. It is explicitly against Substack’s ToS to charge for the newsletter using a third party service but…Also, like, you can just use it for vibe building and sell other things and never pay them.

  3. which, just guessing, is the case for the majority of writers on Substack’s platform

  4. Substack co-founder Hamish McKenzie leans into this hard, writing on Twitter: “When I was a full-time writer, I was practically oblivious to the benefits of owning stock. I was skeptical of capitalism – almost proudly so – and so ignored all that stuff. In reality, that just meant I ceded the benefits to the already well-off.” Y Combinator founders, they’re just like us! Ignoring stuff! Democratizing wealth for only 10% of your revenue! Money please!

  5. at least more than I do

  6. Substack as a co-op would be hot

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