April 11, 2023

Has Substack’s Net Revenue Nearly Flat Lined?

The past week has been particularly news-heavy for Substack between it attempting to raise $5m+ from its unsuspecting writers to getting banned from what has, historically, been the biggest driver of subscribers: Twitter.

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Now let’s jump in…


First up is the fundraise.

A few weeks ago, Substack announced that it was raising $2 million on Wefunder in a crowdfunding round. In essence, it was going to its writers and giving them a chance to own a piece of the platform. It very quickly increased the amount to the capped $5 million because there was so much demand.

The announcement, itself, wasn’t interesting. But late last week, it released its audited 2020 & 2021 financial results. Instantly, something smelled off. Where were the 2022 financials? Naturally, someone (named Jason apparently) asked for them on Wefunder. Substack responded:

Hi Jason! We’re not going to disclose our 2022 financials. We’ve shared a significant amount of detailed financial information, including two years of audited financial statements and additional data on Substack’s growth since then. We’re still a private company operating in a competitive landscape and we will not be sharing any other financial information.

We appreciate your interest. Substack is a startup on an extremely ambitious mission, which is inherently risky. We encourage you to make the decision that makes the most sense for you.

This is a garbage answer. There is nothing competitive about your revenue numbers when you’re a single revenue stream business. The reality is, the numbers likely don’t look all that impressive and are an indication that the valuation is atrocious.

So, let’s dig into those numbers a little bit. There are a few gross revenue numbers to discuss in the filing.

  • Subscription Fees: Standard 10% it collects from all writers.
  • Partnership Subscriptions Fees: Substack provided minimum guarantees to writers and, in exchange, got 85% of the revenue for the first year.
  • Custom Domains: It charges $50 for a custom domain.

While it calls all of this gross revenue, I’d feel more comfortable calling it net revenue. But Substack does what it wants. According to the financials:

  • Subscription Fees: $6.29 million
  • Partnerships Subscription Fees: $5.52 million
  • Custom Domains: $122,000

In total, it generated approximately $11.9 million in revenue in 2021. That was up majorly from 2020 when it only generated $2.37 million in total revenue. That kind of growth is pretty impressive.

But a few things stand out to me here.

First, its partnership expenses were $16.65 million in 2021. That means that it gave writers guarantees of over $16 million and only generated $5.52 million on it. In other words, it’s lost a boatload of money on those sorts of deals.

Second, its revenue in 2022 will likely be materially lower. To generate $5.52 million in partnerships subscription fees would require partners to generate $6.5 million since Substack takes 85% of this in the first year. Assume, therefore, that in year two, it’ll only earn $650,000 on that $6.5 million.

In 2021, we know that the network’s gross subscription revenue was $69.4 million. Subscription fees are $62.9 million and we already established that partnership revenue is $6.5 million. That’s $69.4 million. At the end of 2021, it announced it had 1 million paying subscribers. In early 2023, it hit 2 million. If Substack stopped partnerships because it was obviously burning millions of dollars, then every dollar generated would be at the flat 10% subscription fee. Therefore, network gross revenue at the end of 2022 would be $125.8 million ($62.9 million * 2). Substack’s net revenue, therefore, would be $12.5 million.

It generated $11.9 million in 2021. If its 2022 revenue was only subscription fees, then it would generate only $12.5 million. In 12 months, net revenue grew by only $600k.

I wrote a few weeks ago that it was virtually impossible for Substack to generate less than $12 million because it had 2 million subscribers and the floor price is $5 per month. I guess I was right.

This obviously makes a major assumption about its partnership revenue. If it continued doing those deals, net revenue would obviously be much higher. As of March 2021, Substack was still talking about partnership offering, so maybe there is some leftover revenue at the much higher 85% in 2022. But since it lost so much money on partnerships, you’d have to imagine it would want to stop these as soon as possible so it didn’t burn any more much needed cash.

Hot damn! This is not a great position for Substack. And it is a horrible position for anyone investing in Substack at this valuation. When investing at such a massive valuation, you assume growth is on your side. But clearly Substack is not growing its net revenue quickly. If my math above is correct, then it’s barely growing at all.

Now let’s leave the fundraise behind and move to the next problem. Twitter and Substack are now at war. According to The Verge:

Writers trying to embed tweets in their Substack stories are in for a rude surprise: after pasting a link to the site, a message pops up saying that “Twitter has unexpectedly restricted access to embedding tweets in Substack posts” and explaining that the company is working on a fix.

After those reports surfaced, between Thursday night and Friday morning, Twitter apparently began to restrict promotion and visibility for tweets with links to Substack posts. New tweets linking directly to Substack.com can still be tweeted, but trying to retweet or like those tweets via Twitter’s website results in an error message saying, “Some actions on this Tweet have been disabled by Twitter,” while doing the same from within its apps or TweetDeck appears to work while failing silently.

This is obviously in response to Substack introducing its Notes product. According to Substack’s announcement:

In Notes, writers will be able to post short-form content and share ideas with each other and their readers. Like our Recommendations feature, Notes is designed to drive discovery across Substack. But while Recommendations lets writers promote publications, Notes will give them the ability to recommend almost anything—including posts, quotes, comments, images, and links. Our goal is to foster conversations that inspire, enlighten, and entertain, while giving writers a powerful growth channel as these interactions find new audiences. 

Imagine Kareem Abdul-Jabbar leaving a comment on Margaret Atwood’s note about trends in science fiction, or Alison Roman sharing a quote from an amazing recipe developed by a little-known food writer who then gets a flood of subscriptions. Think of your favorite Substack economists nerding out in a deep thread about the latest jobs report, or Joe Posnanski and Molly Knight going back and forth about Major League Baseball’s Opening Day.

Uhh… That’s Twitter. It even looks like Twitter with hearts, comments, and retweets (though not called retweets). No wonder Twitter is now blocking Substack.

But I don’t really care about the corporate warfare. This is what happens when platforms become parasitic with each other. That said, I do care about are the newsletter writers. They are, once again, being screwed by the platform decisions.

Many writers depend on Twitter to grow. It’s how I got many of my early readers. People build followings on Twitter, promote their content, and then get people to sign up for the newsletter. But now, these writers won’t be able to grow as quickly from Twitter. And that’s a problem.

Building on rented land is dangerous. And that’s exactly what you’re doing when you use a tool like Substack. They decide what features to introduce or not allow on their platform. This is one of the big reasons why I left and built my own stack. How I did it isn’t terribly efficient. WordPress is the CMS; Campaign Monitor is the ESP; WP Engine is the web host. It’s a lot of tools to manage. However, nearly half of the internet runs on WordPress, so I’d be shocked if Twitter ever blocks that.

That’s why I was so excited to become an investor in Beehiiv. It takes all of those tools and rolls them up into a single platform. If you’re trying to build a newsletter and you don’t want to get caught up in the ideological battles of centralized platforms, I don’t think there’s any tool better. It offers all the same features that Substack does. If you’re a Substack writer and you’re thinking about leaving, let me know or sign up here (referral link).

Is Beehiiv the tool for everyone? No, of course not. As your media company grows, there are going to be features you want that they might not offer. But with so many people continuing to launch newsletters, it’s an amazing option.

To sum it up… Substack as a business is stagnating. It’s trying to raise extra money from its biggest fans, but this is more of an emotional investment, not a rational one. Adding to this, Substack writers are now losing a major growth channel with Twitter blocking links. Media is hard… Even when you’re a platform trying to “support” media.

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