Substack drops fundraising efforts as market falters
Substack, the newsletter platform that attracted prominent writers with their promise to make money from their relationships with readers, has abandoned fundraising efforts after the venture investment market slowed in recent months, according to people familiar with the decision.
Substack has had discussions with potential investors in recent months about raising $75 million to $100 million to fund its business growth, said the people, who spoke only anonymously because the conversations were private. They said some fundraising discussions have valued the company at between $750 million and $1 billion.
The decision is another sign of a stark shift from recent years of free cash flow for young startups, particularly bustling consumer-facing companies like Substack, which has raised at least $86 million over three rounds of funding, according to PitchBook, which tracks financing.
Now, investors are calling for austerity and a halt to new deals, especially for companies that have spent aggressively on growth with no signs of turning a profit. Although Substack is still hiring, other companies have faced layoffs or lower ratings, with some Comparison This shrinks back to the years after the 2008 financial crisis or the 2000 dot-com bubble.
Substack spokeswoman Lulu Cheng Miservi declined to comment on the company’s financial statements or any financing talks. The company is still in growth mode, she said, pointing to a webpage with more than a dozen job listings, including growth head.
“My comment is www.substack.com/jobs,” she said.
The terms of the investment under discussion in Substack marked a jump in the company’s valuation, which was said to have reached $650 million last year after the company closed a $65 million funding round from investors including Andreessen Horowitz.
People familiar with the fundraising talks said Substack told investors it generated about $9 million in revenue in 2021, meaning the discussions valued the company at a significant premium over its financial results. Such a high valuation of a company with relatively small revenues was more common in the final months of 2021, when the stock market was booming and investment firms were more bullish on startups.
The company has presented itself as an alternative to well-known publishers of news articles, graphic novels and books. Substack says it gives writers a fairer share of the proceeds from their work. The company receives 10 percent of the total revenue paid to writers by subscribers to their newsletters. Stripe, Substack’s payment processor, takes another 3 percent.
The company has acquired influential writers including journalists Matthew Iglesias and Glenn Greenwald, and Heather Cox Richardson, an American history professor. Company executives have said that more than a million people pay to sign up for newsletters on its platform, and that users pay more than $20 million a year to subscribe to Substack’s 10 most popular books.
But some of the writers who initially won through the Substack offer eventually decided to leave the platform, preferring to attract their audience directly without paying their share to the company. Others have been disappointed by the company’s hands-off approach to editing content on the platform. Last month, The New York Times reported that some newsletter writers were exploring alternatives like Ghost, a platform that offers services similar to Substack. Ghost’s open source publishing platform does not modify the content, but the paid hosting service has some restrictions on content that advocates violence or violates the law.
Substack also faces stiff competition from major tech companies, along with many media companies seeking to compete with. Twitter, LinkedIn, The Atlantic and Puck — a startup founded by John Kelly, a former editor at Vanity Fair — use email newsletters as a channel to interact and make money from their audiences.
Substack is among a handful of startups that are booming in the shadow of the pandemic, and investors are starting to struggle to funnel money into them at sky-high valuations. But by 2022, some of the pandemic’s winners, like the audio app Clubhouse or the grocery delivery service Instacart, have seen their explosive growth begin to slow as people return to their daily routines.
Wider economic forces, including high interest rates, ballooning inflation, and a stock market slump, have exacerbated the gloom.
Erin Griffith Contribute to the preparation of reports.