Substack takes a different tack to raise more capital


Image Credits: Nigel Sussman (opens in a new window)

It turns out that if you have an active customer audience invested in the long-term viability and success of your platform, you can crowdfund a venture-sized extension round.

Substack, a venture-backed subscription media platform popular with writers and known for its email service, has collected more than $5 million in pledges for an extension to its Series B from its community and the internet at large. The sum pales compared to how much it raised in its early-2021 funding round worth $65 million, but it’s still real money and capital for a startup that reportedly shelved its Series C hunt.

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The company intends to share more financial data before its equity crowdfunding actually collects funds from its new investor group, figures that could shake up the amount of capital that it can raise; poorer-than-anticipated numbers could scare off some checks, while stronger-than-expected figures could help ensure that its ample pledge count becomes concrete in the form of capital in the bank.

Perhaps Substack can grow just fine without venture dollars

I’ve covered the odd crowdfund before, including’s first and successful round that it put together on Republic; a later attempt by the same company to raise more didn’t work out, but the model has juice. Frankly, Substack’s rapid success in attracting more than the legal yearly limit for equity crowdfunding in the form of pledges indicates that the method of fundraising remains viable.

For some companies, at least. Substack is framing its crowdfund as a way for its users (customers, really) to buy into the platform they use. That’s pretty cool, frankly, and will provide its active users with a stake in their own platform.

The sticky bit is price.

When Substack wanted to go out and raise its next round of venture capital, it had to go through a pricing process. Reporting from the time indicated that its expectations were in the $750 million to $1 billion range. That price didn’t clear, given that the fundraising effort was called off. After that, the company tightened up its cost structure and kept growing.

If Substack went out to raise more capital from professional investors today, it would once again have to go through a price discovery process. One way to avoid that would be to raise a traditional extension round from one of its existing investors, something that — per PitchBook data — has not happened. Inside extension rounds at flat prices are not incredibly bullish events, but more something that we see happen when funding markets get rapidly worse and existing investors want to give a portfolio company more space to grow into their valuation under more exacting market expectations.

This is where the Substack crowdfund gets tricky.

On the one hand, the company is allowing more folks into 2021-round pricing in 2023. You could view that as generous, given that Substack has grown substantially since then.

A more critical take would go like this: Substack’s 2021 valuation is above its real worth today; thus, allowing nontraditional investors to buy into its shares at a price that professional investors would not pay is unfair to the nontraditional investing group. They may be overpaying, straight-up.

The easy rebuttal to that critique is that Substack is not really selling a lot of stock — $5 million off a $655 million post-money valuation is 0.76% of its shares — and that folks buying the shares are doing so to support the company rather than looking for material upside. Sure, but that’s still thin comfort for folks potentially paying more for a stock than it would be worth to a venture firm.

Ironically, Substack’s users could be giving professional money managers in the company a bit of a breather. The venture investors that once put a mountain of capital into Substack don’t have to invest more, the incoming dilution is effectively zero and the company gets more total funding to pursue its long-term goals. For Substack, this is a win.

We won’t see this sort of conundrum too often. Most startups could not manage this sort of crowdfund because their customers pay them, not the other way around. In contrast, Substack users make part or all of their living from the company, so they are more invested in it sticking around. This makes the Substack crowdfund unique.

One way to get around the pricing matter — and avoid letting comparatively undercapitalized writers subsidize Andreessen Horowitz — would be to sell stock at a down-round price. Doing so might complicate Substack’s later ability to raise venture funding, so it’s threading a needle here, and we’re not surprised that it is avoiding irking its prior backers. Backers that may become future investors in the company.

I get it. Capital is harder to raise today, 2021 valuations are out of whack with the market, and Substack found a neat way to add capital without going through a pricing argument.

It just seems ever so slightly unfair to its customers to let them pay a price for its stock that might be unrealistic.

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