Perhaps Substack can grow just fine without venture dollars

Substack, a publishing platform known for its newsletter service, announced this week that it had crossed the 2 million paid subscription mark. Given the wealth of historical data we have concerning the growth of paid subscribers at Substack, the number got our attention.

Substack’s simple business model also makes it possible to generate a few gross transaction volume and revenue guesses for the company, which we’ll explore.

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First, a little context: Substack’s first known external capital came in January 2018 via the Y Combinator startup accelerator. The company raised a $2 million seed round in April of the same year. From there, the startup’s ability to raise new funds quickly accelerated, with Andreessen Horowitz leading Substack’s $15.3 million Series A in mid-2019 and a massive $65 million Series B in March 2021.

The venture market peaked later in 2021 and has operated from a less risk-on posture since early 2022. Substack, The New York Times reported in May 2022, wound up calling off raising what would have been a Series C. The company had targeted, per the Times, an even larger funding round than it raised during its Series B, priced at up to the $1 billion mark.

After it put fundraising on ice, Substack cut some roles in June 2022. It was hardly the only startup trimming costs during that time. Since then, the startup has not raised known external capital and instead worked on growing its business and competing with companies like Beehiiv and indie projects like Ghost.

The appetite for new investments into media and media-ish companies by Andreessen Horowitz has seemingly slowed: Clubhouse, another of its 2020-2021-era bets, has not raised capital since June 2021. Substack, however, has continued to expand.

In fact, with growing transaction volume and revenue, alongside curtailed costs, Substack is probably doing what many startups in the market today are busy with: working toward profitability in an uncertain venture capital market.

So, how has Substack done since its venture funding journey paused? Pulling from some of our prior work regarding the company’s growth, and extending it with two further data points, here’s what we know:

  • 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 “paid subscriptions,” per Bloomberg.
  • November 2021: 1 million “paid subscriptions,” per Substack.
  • February 20223: 2 million “paid subscriptions,” per Substack.

Data visualization by Miranda Halpern, created with Flourish

The swap from “paying subscribers” to “paid subscriptions” may be incidental or a shift in how the company reports its numbers. We’re not too worried about the evolution; “paid subscriptions” is a more telling number than “paying subscribers,” so the data we’re looking at has become clearer over time.

Substack’s first external capital landed in January 2018. That means it took the company at least 46 months to get to 1 million paid subscriptions. More recently, it took Substack around 16 months to reach the next million-subscription milestone. The company’s growth in raw subscription terms, therefore, appears to be accelerating, though we lack real perspective into how it performed in recent months, so it’s certainly tricky.

Substack appears to be doing pretty much what we presume it set out to do. So why hasn’t it been able to raise more venture capital? That may be the wrong question (more on that in a moment). So let’s get a handle on how big Substack’s business may be today by looking at a few estimates (the company’s minimum monthly price is $5 per subscriber) to help answer our question:

  • With 2 million paid subscriptions and a monthly average cost of $7, Substack’s gross transaction volume works out to $168 million. At its 10% cut, Substack’s annualized run rate would work out to $16.8 million.
  • With 2 million paid subscriptions and a monthly average cost of $9, Substack’s gross transaction volume works out to $216 million. At its 10% cut, Substack’s annualized run rate would work out to $21.6 million.

Substack is on a comfortable run rate that should provide it with lots of high-margin revenue to pay its staff. It may not need more money to operate, obviating the question of why it doesn’t raise more money.

At the same time, Substack is not a fit for the current venture capital climate. As investor Elad Gil pointed out recently, in the present day, every $1 billion of tech company value requires “$100M to $150M in revenue growing 30% a year.”

Substack, with a $650 million trailing venture capital valuation, is not currently right-sized on the revenue side to support its price. A lot of startups raised capital during the boom at prices that no longer make sense; this is hardly a unitary sin, nor one that Substack should collect all the blame for.

All the same, the company’s expanding revenues and scaling business model don’t square up with its last venture price. So, Substack could raise a down round, or it could simply use its remaining cash balance to grow and eventually become profitable.

This is actually somewhat encouraging. If Substack were still on a venture-backed trajectory, it might be forced to trade customer value for short-term growth to keep its investors happy. Instead, the company gets a shot at self-funding its way forward, meaning that it can answer to its customers before its investors. Since Substack is now, presumably, at least temporarily exempt from the need to raise more venture funding, it can work for its customers (i.e., writers) instead of its investors.

The obvious counter-argument here is that Substack may be more unprofitable than we imagine and, therefore, in need of eventual cash regardless. We’ll see.

As a person who scribbles for money, I am pleasantly surprised at Substack’s growth — I have a personal blog there, I feel like I should add, though it is not monetized — as it underscores the value of writing. It just appears that writing isn’t super venture-backable. Oh well.