They raised a ton of money on a high valuation, spent 25mil to make 1 mil last year and are now scrambling to raise a new crowd sourced round because they don't want to get wiped out in a down round.
This notes thing looks like an attempt to pivot to an advertising based business model and I'm guessing they think they have "influencers" on their platform to bring in a decent audience.
"The ultimate goal on Substack is to convert casual readers into paying subscribers. Because the Substack network runs on paid subscriptions, writers are rewarded for respecting the trust and attention of their audiences, not exploiting it like with ad-based social media."
"While Notes may look similar to social media feeds, the key difference is in what you don’t see. The Substack network runs on paid subscriptions, not ads. It’s social media with a heart transplant."
Because no company would ever lie about their intentions, or at the very least pivot to the exact opposite of their original point without a second thought.
"Because no company would ever lie about their intentions, or at the very least pivot to the exact opposite of their original point without a second thought."
No business would pivot to a dying monetization model unless it was their last option.
Advertising is not a solution for Substack; but rather a Trojan Horse.
As much as I wish this were to true, it’s objectively false. Digital advertising is a healthy industry that powers many profitable companies. Substack is not profitable and torching money even with a 10% claim on wroters’ subscription revenue
Dying monetization model? Is that why Microsoft, Amazon and Apple App Store are splattering their properties with them like a Jackson Pollock painting?
Imagine spending only 30% of your net worth and getting to experiment with buying and growing one of the most used and talked about sites on the internet.
If I spent 30% of my net worth I could buy a condo in the bay, possibly. Although odds are it would be worth close to that if I needed to sell it.
But many people spend 30% of their net worth trying to start businesses with almost no traction.
Musk spent 30% to buy something known internationally.
Imagine spending only 30% of your net worth and getting to experiment with buying and growing one of the most used and talked about sites on the internet.
That sounds like one of the least interesting things I could do with $44bn.
With that sort of money I could fund 1000 Twitter rivals, and after a couple of years combine the successful and interesting ones into a single rival that would actually do something better than Twitter.
Rather missing the point that any of those are more interesting than "a thousand Twitter clones". But even on that point, Musk managed to do a lot with SpaceX and Tesla supercharger network which need various government support and approvals.
Definitely doesn't make it a good idea. But it's still interesting that he's playing with one of the most talked about sites on the internet without really affecting his finances at all. Of all the random things to do with your money, it's not even that bad of an experiment.
He's not a kid using his parents money. He's using his own and his personal name/reputation to secure money.
He's not hurting an ant. He fired people and let them go find other jobs which seems pretty fair instead of for example reducing their pay drastically and forcing them to quit, or paying them minimum wage and profit sharing. Which still would have been pretty fair IMO.
Not every ceo or company owners needs to be operating a charity like the previous Twitter CEO was.
Given he continues to talk with the man at times (he replied to one of his tweets the a few days ago) and there's no evidence to support the idea that he did it for monetary reasons, other explanations are much more reasonable. Namely that it was a simple mistake.
1. I care pretty strongly about the truth. When I see people actively spreading incorrect information whether through malice or their own misunderstanding I think it’s important to correct it to prevent the deception of others, especially when it’s happened on such a wide scale. He himself doesn’t seem to understand that it’s important to correct this type of thing early so there’s no other option.
2. I care because a lot of the future depends on the success of Elon’s companies and people use tearing down Elon as an excuse to attack his companies. They’re doing amazing things for the future while being constantly attacked for it.
So it’s a double-whammy of self interest and my own internal mental obsessions.
Some of us like sticking up for people of similar temperament to us. I'd stick up for the average person that gutted a company he bought and kept it running just like I would Musk.
I like Musk because he doesn't appear to be a woke tool. Is he a tool of a different kind? Probably. But I don't like woke, so I stick up for the non-woke. Is he perfect? No. None of us are.
What does woke mean? Elon seems like he’s always talking about woke stuff. Like trans people and pronouns. He might be denouncing those topics but he still seems to cover them a lot.
Why do you care? You’re here engaging all the same. If anything, he’s speaking the truth (no he did not mock anyone’s disability) and those attacking Musk are lying. Yet you question the person being factual. So why do you care?
He was certainly fine making accusations in public about this person. When he found out he was given misinformation why didn't he name the person and fire them? Why did he air it out in public in the first place? The whole saga is criminally ignorant and Musk is to blame.
When people make mistakes under him, he never names them and instead takes ownership of their mistakes. Naming and firing them would be in fact a bad sign and a sign of a bad leader.
The economics on those deals look worse over time -- they're spending over $3 in guaranteed payments per $1 collected on those partner subscriptions, which meant partner subs went from being mildly profitable (gross) in 2020 to a $10mm cash sink in 2021. The good news is that overall the subsidized writers should be making enough for Substack to shut down the incentive payments (~$40mm in subscription revenue to writers vs $16mm in subsidies in 2021), so there's a good chance they can stop the bleeding. Still overvalued by at least 25x, though, and their OPEX is concerning; even if you ignore the $16mm in partner payments, they're still $6mm underwater on $10mm in revenue.
A lot of the top writers have large guaranteed incomes and related incentive structures. The 20M is not all revenue, some of it is a cost for Substack.
I couldn’t reply sooner because I have noprocast on but my numbers were a bit off, I was repeating what I heard on a tech podcast. According to the numbers they had to release it was a bit higher https://www.axios.com/2023/04/07/substack-gets-writers-to-in...
I remember there was a time when people were excited about medium. Then medium needed some money so they started blocking readers behind login dialog boxes. Then come substack and everyone got excited about it. Sooner or later it will be on same path that medium took.
When will we realise that blogging websites (not personal blogs) are not sustainable in long run.
Imo, a blogging software company really does not need to be valued in the billions or make a ton of money. The tech can be maintained by a relatively small team of people - see all the independent blogging platforms and open source tools.
This is a classic case of VCs corrupting an industry with money that’s really not needed at valuations that really can’t be supported.
One could argue that social media is technically all "blogging websites"
Advertising works there because of the numbers. People will quickly consume enough bite sized content to drive traditional numbers.
Medium broke the things that made them appealing in an attempt to sweeten the advertising sell, but this made the platform unappealing. It was a self inflicted wound.
> Advertising works there because of the numbers. People will quickly consume enough bite sized content to drive traditional numbers.
To be more specific, advertising works there because of the feed algorithms. The platforms gather data about user interests and use that to tune what they choose to show the users, favoring things the algorithms suggest will get more "engagement". In turn, they sell ads on those favored items. On top of that, they charge both users and advertisers a premium to be featured on the favored topics.
Take away the algorithms that determine what content and ads to feature, and you get back to the basics of blogging websites. You get happier users, but no advertising money.
Medium broke things (by making people login) precisely because they wanted to charge money, because they did not want to use advertising (and AFAIK they still don't).
Easy to self host? We live in a world where Mastodon had to change their signup screen to de-emphasize "pick a server" because people had no idea what that meant.
From your source, their 2021 net profit was -$6.5M and their 2020 net profit was $1M. They seem to be mixing the $24.6M in negative cash flow for 2021 with the $1M in net profit in 2020? Doesn’t make any sense.
Yeah sorry about that, I was just repeating something I heard on a podcast and it looks like they assumed that was top line revenue and took 10% of it.
It still blows my mind they can’t run this tiny operation profitably taking 10% of many multimillion dollar writers’ revenue. Is it a requirement that YC companies raise way too much money and then proceed to torch it any way possible?
> They raised a ton of money on a high valuation, spent 25mil to make 1 mil last year and are now scrambling to raise a new crowd sourced round because they don't want to get wiped out in a down round.
Sorry to get off-topic, but is there a read/book to understand funding, VCs, etc., from a holistic POV. I totally didn't expect that consequence of having to raise a crowd sourced round due to initial high valuation.
- Their valuation is high because they raised during the recent bubble
- If you raise more money at a lower valuation than your last fundraise, it's highly dilutive. Investors paid $10 for 10% of a $100 valued company last round during the bubble. Vs. given current market conditions, new investors would only pay $10 for 20% of a $50 valued company this round. This second round would dilute existing investors, except...
- If you crowd source the funding, now you can raise at a $100 valuation again (less dilution), because these crowdsourcing investors don't know what they're doing
“Venture Deals: Be Smarter Than Your Lawyer And VC” is pretty good. Used it when raising a round of funding.
“The Power Law: Venture Capital And The Making Of The New Future” is also good. It tells the story of the evolution of VC over the last 70 years. It is interesting that funding terms seem to be becoming more and more founder-friendly over decades.
Having been in/around the game for a good few years, I can assure you it's not nearly as complicated as they try to make it sound.
The game works like this: the VCs want 100% of your company, and you want to give away 0% of your company. (Of course, 90%+ of companies will fail, so it doesn't really matter. But let's pretend we're all in that special 10%.)
If you do end up choosing to play that particular game, then you'll find some common numerical rules of thumb. They usually go like this: Each round should raise 12-18 months of runway, and each round's investors usually get about 20-30% of your company.
On one side of the game, you have the VCs, who basically play this negotiation full-time — and whose comp structure depends on extracting as much equity from you as possible. This is why we get the constant stream of "thought leadership" from VC bloggers, because they're trying to distinguish themselves as offering something more than capital. (And, having distinguished themselves, they can extract more % from you for less $.)
After decades of practice, VCs have plenty of hustles they can run. Some of the classics are the old "participating preferred" play, as well as the usual sound bite about how "it doesn't matter what the exact numbers are."
On the other side of the game, you have the founders, who basically want the maximum amount of money in exchange for the least amount of equity — but also for the least amount of time. Fundraising is a massive distraction, and VCs know it — which is why time always gets used against the founder, with long and drawn-out "fundraising processes" that (by total coincidence, of course) also happen to exhaust the founder and push them towards signing.
The twist is that this game isn't only for 1 round. Once you take your company into this game, you're stuck in it — you'll have to keep fundraising to keep fueling the growth that you've kickstarted using external capital. With the average IPO timeline being 7-10 years, combined with fundraising every 12-18 months, you can expect to play this game 5+ times on the way to IPO.
Sometimes, for a variety of reasons, the founder raises too much $ for too little %. You'd think this is a good move — but, since this is an iterated game, it's not all upside. Decisions in this round set the stage for the next round. If you can't live up to the growth expectations implied by the high valuation, then you're in for a "down round."
VCs have a standard "down round" playbook, too. They'll have their way with the cap table, of course — and it's also not uncommon to see some/all of the founding team shown the door. The press piles on as soon as they hear of it, which drags on employee morale as well as the talent pipeline, both of which then destroy product velocity and market positioning... it's very easy to have a single "down round" be the kiss of death for a company.
So that brings us all the way back around to your question. For this particular company — as well as for many others that raised during the "cheap money" era of the pandemic and pre-pandemic years — it sounds like they're facing this conundrum. Crowdsourcing the next round is a somewhat new way to tackle this situation — new regulations came out a few years ago, and founders sometimes go this route instead of risking the "down round" game with VCs.
You usually only see B2C companies making the crowd-funding play in the first place, since you need the name recognition and customer base to even try to raise money in this way. Because founders can essentially "divide and conquer" their investor base in a scenario where everyone's investing only four or five figures, the common scenario here is that the founder sets the terms to avoid the down round — and then they begin the fundraising. Since they're fundraising from hundreds/thousands of people instead of 5-10 people, it ends up being more of a marketing campaign rather than high-touch sales, which can also play to some founders' strengths.
Anyway, I could keep riffing for a while (and I'm sure others here could do even better). I'll let the other commenters chime in with book recommendations — I'm sure someone's written about these market dynamics in much more detail.
> there are early-stage VCs these days, which don’t pressure founders for quick growth
That's really interesting. Do you know how they make that work, exactly?
I feel like that's naturally opposed to the standard incentive structures that VCs have with their LPs. They need to show results in O(years) so they can raise their next fund and keep the overall VC firm going over O(decades). That maps down straightforwardly to the day-to-day pressure VCs put on all their portfolio companies to grow as fast as possible.
Unless early-stage VCs are doing something new with the terms they give their LPs, how could they prioritize anything other than growth?
Down the grapevine at least, a couple Micro VCs ik provide a pipeline for CorpDev teams at larger companies and early stage VCs (Series A-C check signers like Unusual Ventures) to choose pre-vetted companies. Mind you this seems to be more Enterprise/B2B Micro VC oriented.
If the startup is showing good growth metrics, they'd point them to friends at later stage funds. If they aren't, they'd give intros and help get the startup aquihired.
> The twist is that this game isn't only for 1 round. Once you take your company into this game, you're stuck in it — you'll have to keep fundraising to keep fueling the growth that you've kickstarted using external capital.
Why? What stops you from raising a $15m series A and only burning it conservatively until you hit neutral profitability. Investors only have 15-25% of your cap table and can't strong-arm you.
You would have had to mislead them right? Why would they give $15m to use slowly when they can give $15m to a company that will use it quick, assuming both companies are using it in a +EV way?
I don't have a resource for you (and will probably read whatever you get linked), but one intuitive way to think about it is that VCs/investors (and most of the startup ecosystem) are generally focused on "growth", not "performance".
You can be a stable, profitable, money-making machine with 90+% margins and amazing reviews, but unless you're doubling something (users, engagement, profits, etc) every single year, you go to the back of the potential-investment line.
A high initial valuation might be great for performance relative to other companies (or whatever reasonable metric you want to insert here), but it also makes it way more difficult to show "growth" YOY compared to a lower initial valuation.
What did they spend their $25 million on? What's the tech they have that costs this much to build? Their hard problems are a building a CMS or are otherwise solved by using fastly and sendgrid?
Just to mention one thing that isn't user facing (and therefore not so obvious): Social media companies dealing with user-generated content have to build their own enforcement mechanisms (abuse, copyright infringement, etc.), which is at least an order of magnitude harder than the user facing content engine itself.
>This notes thing looks like an attempt to pivot to an advertising based business model
The announcement for the feature on twitter[1] literally emphasizes the lack of ads, pointing out subs are their revenue source, so that would be some 4D enshittification chess.
Only victims are the pension funds and sovereign funds and HNIs who fund VCs. Everyone else made money. Founders made money at every raise, employees made money with fat salaries, users “made” money with fat discounts.
They got to make more than 0.00% return for the last 10 years, their only mistake (for those that made it) was thinking the party would last forever and trees would grow all the way to the sky.
This notes thing looks like an attempt to pivot to an advertising based business model and I'm guessing they think they have "influencers" on their platform to bring in a decent audience.