How much money do we think Substack lost last year?

Substack is desperate, huh? That’s what I understand from their fundraising email, anyway. They’re now hitting up retail investors for millions of dollars after they failed to raise last year.

After certain recent historical events, I have become skeptical of the term “financial inclusion,” a set of buzzwords for making financial services more available to people who are not stratospherically rich. Maybe my cynicism is because Facebook tried to launch a stablecoin for the “unbanked” that you nonetheless needed (at least, according to the now-scrapped plan) a credit card to use. Maybe it is because Robinhood made a big fuss about how many brand-new retail investors it brought onto its gambling platform. Or maybe it’s the proliferation of buy now, pay later services from the likes of Klarna, Afterpay, and Affirm (and now Apple.)

Anyway, Facebook’s stablecoin play failed and was sold for parts. Robinhood’s share price has fallen by a third in the last year. Oh, and Gen Z’s credit card debt is growing fast and furious. So yeah, when someone talks about financial inclusion, I assume the game is afoot.

Substack’s email begins:

When we raised our last round of funding, in March 2021, we explored how we might make it possible for a large group of writers to invest alongside the traditional investors, but it ultimately proved too complex. Most importantly, it was difficult to include people who were not already accredited investors—a qualification determined largely by wealth. But the idea never left our minds.

Okay, you know what? I believe this is true. Andreessen Horowitz led that round, which gave Substack a valuation of $650 million, and a16z has been merrily dumping on retail through their crypto investments for some time. It does not surprise me that someone might have thought Substack could expand the strategy!

Perhaps you are thinking, but Liz, retail investors do get left out of early funding rounds, which can be very lucrative! And this is true — VC did very well from 2011 to 2021, with a 10-year return of 20 percent. But, as we all know from reading our 10-Ks, past performance is not indicative of future results.

You see, the last time Substack raised, the Fed hadn’t started its rate hikes yet. Startups — like Substack — are particularly vulnerable to being squeezed when the interest rates go up. It gets harder to raise money because conservative investors can simply invest in safer assets.

And during that 10-year period I cited with those outsize returns, interest rates were low and valuations of private companies ballooned. Now, with interest rates coming back up, those balloons are popping. Some VCs are slicing valuations by as much as 95 percent. There may be even more write-downs coming. And following the collapse of Silicon Valley Bank, there’s a considerable amount of uncertainty in the VC world.

Substack certainly knows this. It tried to raise last year, seeking $75 million to $100 million from investors. But it had revenue of only $9 million in 2021, and a sky-high valuation on relatively little revenue was not the vibe in 2022. The company gave up. On its Wefunder page, the company says that the pre-money valuation on Substack is now $585 million, a 10 percent decrease from 2021.

And now Substack has turned to Wefunder and retail investors. Friends, I do not like it, not least because the VCs last year got a pitch with Substack’s annual revenue, and I do not see that shit line-itemed anywhere on the Wefunder page. Where’s the money, Lebowski?

Substack makes its money by taking a 10 percent cut of the subscription fees its newsletter writers charge. (Its payment processor takes another 4 percent, according to Wefunder.) The company says it paid out more than $300 million to writers, cumulatively.

There is, however, a chart, so I am now going to do something really annoying.

Let’s eyeball that at $140 million paid to writers as of January 2022. So, with the caveat that everything I am about to type is guesswork and coffee fumes, we can assume that Substack paid out about $160 million in the last year alone. Time for some fun algebra!

160 + 0.1x + 0.04x = x, where x is the total amount of subscription money paid, 0.04x is the payment processor fee, and 0.1x is Subtack’s revenue. I’ll spare you the thing where I put all the xes on the same side and just solve: x is about $186 million. So that gives us revenue of about $18.6 million in 2022.

Doubled their revenue in a year! Not too bad. I might have some other feelings if I knew anything about their cost basis, but unfortunately, I don’t. So I don’t know if the company is profitable, but I am going to take a flying leap and assume not — because in this environment, profitability is something to brag about.

In the FAQ section of Wefunder, I notice someone is asking if there are plans to sell or go public, which Chris Best, co-founder and CEO, dodges except to say, “Don’t invest more than you can afford to lose.” Nor has anyone answered an extremely reasonable question about monthly net income, cash burn, and runway, not even by dodging.

I’ll tell you something: if I am considering an investment in a startup, you better answer my questions. I emailed Best to ask him about cost, revenue, and why these figures weren’t included in the Wefunder. I also asked him how he expected people to make informed financial decisions without these things. He didn’t immediately reply.

But maybe it’s now time to notice how I received this in the first place: in my email. I subscribe to a number of newsletters and have parked my own newsletter domain on Substack. If we turn to the pitch email, it’s a bunch of marketing speak about network effects and the importance of writers. I’ll tell you right now: I’ve been a writer for most of my life, and we are about as important as a fart in the wind.

So let’s read this together: 

We are serious about building Substack with writers, and this community round is one way to concretize that ideal. We’re doing this because the dynamics of a platform like Substack change if the people who are building their businesses on it are owners of it too. And we’re doing it because it not only provides something good for our company but also presents an opportunity for the people who use Substack to participate in the benefits that come from building this network—including the financial upside.

In lieu of a pitch deck, we have flattery. Writers are notoriously bad at math — and even more notoriously bad at managing their own money. Shit, if we were good at this kind of thing, we would be doing something lucrative, probably.

I dislike this framing because it hides something important from the audience it is targeting. If you received this email, you may already be a newsletter writer using Substack for your income. Increasing your exposure to Substack by investing means that if the company folds, first, you gotta figure out how to move your newsletter to keep the money coming in, and second, you lose your investment. Figuring out downside risk is pretty important if you’re going to invest in anything. Like, yes, it is normal for journalists to own shares (or options) of the company they work for but that’s usually because it’s part of the compensation plan.

So let’s talk about financial inclusion: one reason why early-stage investments are generally limited to the ultra-rich is because they have money to lose. Me? A writer? Not so much! You can include me out!

It’s hard for me to read this as anything other than a cynical ploy to rope people into identifying as helping writers in the absence of real financial information. It’s a way to make money, I suppose. But it doesn’t strike me as a good omen for Substack’s longevity.

Still, it seems like it’s been very successful at raising money for Substack — they’ve raised their ask from $2 million to $5 million, the legally allowed limit. I suppose that’s the power of a good story.