Substack didn’t invent the paid newsletter, but the startup’s early success with the model is enticing previous backers to more than double down on the media startup.
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Last evening, Axios reported that Substack is “raising $65 million in new venture capital” at a valuation of “around $650 million.” As you’ve already guessed, Axios goes on to report that Andreessen Horowitz (a16z) will likely lead the investment.
That we’re seeing a16z pour more capital into what we could call the alt-media space is not a surprise. The investing group is ladling even more cash into its in-house media efforts and has put a small archipelago of capital into audio-based social media app Clubhouse. Its internal publishing schedule is in part an attempt to get around traditional media; the Clubhouse universe is an inverted one in which tech investors are celebrities, producers and gatekeepers. And Substack is a place where publications have bled some well-known talent, shifting the center of gravity in media.
You can detect the theme.
Regardless, Substack’s new valuation and investment are eye-catching. This morning, I want to collect all that we can regarding Substack’s historical growth so that we can chew on its new valuation from the best vantage point. Let’s go!
$650 million?
A little history to kick us off. Crunchbase counts Substack’s total funding to date at $17.4 million. PitchBook puts the number at $21.21 million, inclusive of debt. Both sources agree that the company’s most recent round came in July 2019. PitchBook pegs the company’s valuation at $48.65 million at that date.
Raising $17 million in cash around 20 months ago, regardless of debt, is an amount of capital that the company could easily have burned through by now. Raising more funds is therefore not a surprise.
But the size of the new round is notable, as is its constituent valuation. Series A and B rounds have been growing in size in recent years. But a $65 million Series B would stand out, even by 2021 standards. Not shockingly so, but enough that any company raising that sum at its implied level of maturity would demand our attention. That we’re all familiar with Substack only makes the sum more curious.
It isn’t hard to see where the company will put the money to work. The platform has lots of areas to flesh out; competitors like Ghost, Twitter’s Revue, Facebook’s impending newsletter effort, Forbes’ own paid newsletter push, and others are coming for its market position, with a varied feature set Substack will want to match. Having a huge capital reserve will allow Substack to win talent wars for star writers who can drive outsized income for themselves and the platform.
Fronting a few hundred thousand dollars to attract a single well-known writer is expensive for a startup still eating its Series A check from 2019. But $65 million would give Substack all the capital it needs to boost its engineering budget and keep the talent coming.
Why Substack would want the huge check is obvious. But why would a16z be willing to pay $65 million for 10% of the company? Is it generating anything like the revenue base we might expect of a startup of that value?
Thinking out loud:
- Substack’s business category: Media B2B SaaS. Substack sells its software to writers for a 10% cut of their recurring revenues. Those writers sell their newsletters to consumers. The writers are the Substack customer. The readers are the writers’ customers.
- Substack’s implied gross margin range: Strong. Because it is selling software via a managed service, we can presume that Substack has software-like margins. It isn’t clear if they would land at the lower, middle or upper band of SaaS gross margins, but we’re not talking lower than 65%, I’d reckon.
- Substack’s implied growth? Let’s find out.
Now that we know we’re talking SaaS and software margins, we need to get a handle on revenues and growth. From there, it will be easy to see how far in advance — if at all — a16z is paying up for Substack’s performance.
Here’s what we know about Substack’s growth over time:
- July 2019: 50,000 paying subscribers, per Nieman Lab.
- March 2020: 100,000 paying subscribers, per TechCrunch.
- December 2020: 250,000 paying subscribers, per NPR.
- February 2021: 500,000 paying subscribers, per Bloomberg.
With growth like that, it’s not hard to see why a16z wants to put more capital into the business. If it believed in it at 50,000 paying subscribers, it must believe in it even more with 10x the scale in less than two years.
To do some fun math, we’ll need some guesses. Let’s presume that each paying subscriber has 1.2 paid subscriptions. And let’s presume that they cost an average of $7/month. That would convert the above subscriber counts to the following gross merchandise volume results (GMV):
- July 2019: $5.04 million.
- March 2020: $10.08 million.
- December: $25.2 million.
- February 2021: $50.4 million.
You can tune those numbers very easily by raising or lowering the average per-month fee or the number of paid subs per paying subscriber. But you’ll always generate a gross figure. From there, calculate 10% of the total to get Substack’s net revenue under your set of assumptions.
The goal of our little thought experiment wasn’t to learn how large Substack is today. That’s a fool’s errand without more data. But what we have shown is that it’s unlikely that Substack has more than $100 million in GMV today, or double our initial guess. So the startup’s revenues probably aren’t more than the media equivalent of $10 million in ARR; Substack takes a 10% cut of writer earnings.
At $10 million, Substack would be worth 65x its current ARR at a $650 million valuation. We can tell, therefore, that a16z is valuing the little media company as if it has acre-feet of growth ahead of it. Or, put more simply, the venture capital concern expects Substack to turn that half-million paying subscriber figure into 5 million. At which point Substack would be a material business in both GMV ($500 million or more?) and revenue ($50 million or more?).
More capital will help the startup reach those goals. The world recently learned how far $250,000 can go for Substack. Here’s Peter Kafka on the relationship that the startup built with a single writer, Matt Yglesias, for the price of a guaranteed quarter-million in his first year:
Yglesias says he has around 9,800 paying subscribers, which might generate around $860,000 a year. Had he not taken the Substack payment, he would keep 90% of that, or $775,000, but under the current deal, where he’ll keep the $250,000 plus 15% of the gross subscription revenue, his take will be closer to $380,000.
In the end, if Yglesias stays, Substack will make over $100,000 in his second year after minting cash during his first. More capital means the ability to execute more, similar deals.
At the least, a16z is betting that there is a lot more supply (more Yglesiases!) and more demand (more subscribers!) waiting to be tapped. More than 10x as many. If you are bullish on that point, Substack’s growth makes it more than worthy of new capital and a winsome valuation. That we’re discussing a16z during 2021 is why, however, every fundraising in this piece has felt inflated by a factor of two.
More when this round inevitably closes.
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