March 7, 2023

Substack Can Grow Into Its Valuation

When Substack failed to raise money at a $1 billion valuation, there was some schadenfreude. I heard from many people who questioned whether the company would ever be worth its already lofty $650 million valuation. I have certainly not hidden my frustrations with the platform. But I believe there’s a path for Substack to grow into its valuation.

But first… A message about our sponsor, Omeda.

What do Southwest Airlines and media tech stacks have in common?

They’re really not great. The problem is that there are tools for everything. ESP? Check. CDP? Check. Subscription management? Check. Getting all of those tools communicating in a seamless way requires a ton of engineering lift and even then, it struggles.

Make 2023 the year that you streamline this. Omeda has published a post outlining five steps to take control of your tech stack. Our tech stacks are supposed to work for us, not the only way around.

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Now let’s jump in…


Substack announced last week that it had hit 2 million paid subscriptions on its platform. Axios has a good chart about the growth of the platform since October 2020 that’s worth looking at. In a nutshell, Substack has effectively doubled the number of paid subscriptions from late 2021 to early 2023.

And so, I endeavored to calculate how much money Substack was making to argue whether it could justify its valuation. When I originally tweeted about it, I argued that it was making $24 million in net revenue.

My logic was straightforward. It has 2 million paying subscriptions. According to research that Piano released four or five years ago, the sweet spot for consumer subscriptions is $10 per month. And so, $10 times 2 million is $20 million and over a year, that’s $240 million. Since Substack gets 10% of that, I assumed $24 million.

But this assumed that it was generating $10/month/subscriber. And so, I wanted to dig a little more.

The biggest assumption I made was the $10 per month. But if we look at Letters From an American, one of the largest paid newsletters on the platform, the author is only charging $5 per month. That’s the absolute cheapest that the company allows a person to charge. Therefore, with 2 million subscriptions and $5 per month price, it’s making at least $12 million in revenue.

Alright, so now we have a floor. It’s highly unlikely—and I may even say impossible—that it’s making any less than $12 million in net revenue.

CB Insights’ Anand Sanwal reports that Substack’s 2021 revenue was ~$9 million. We know that was on the back of 1 million paid subscriptions. If we take an average, it comes to about $7.50 per subscription. Therefore, with 2 million paid subscriptions, the company is likely generating $1.5 million per month in net revenue—or $18 million per year.

Without doing a deeper analysis on every single publication and how much they charge, it’s hard to zero in on a final number. So, let’s use $18 million as the number.

Now the question is whether Substack can grow into the $650 million valuation. At those revenue numbers, it’s valued at 36x revenue. That’s a lofty valuation for any company, but especially one where it’s tied to the growth of media companies. Whether Substack likes it or not, it can only grow as fast as its customers grow. And media companies do not grow unbelievably fast.

But high valuations are only a problem if you need to raise more money. Otherwise, you have time to grow into them. And based on my math, Substack is likely breakeven or close to.

According to The New York Times back in June 2022:

Substack, the newsletter start-up that has attracted prominent writers including George Saunders and Salman Rushdie, laid off 13 of its 90 employees on Wednesday, part of an effort to conserve cash amid an industrywide funding crunch for start-ups.

In his remarks to employees, Mr. Best said the company’s revenues were increasing. He noted that Substack still had money in the bank and was continuing to hire, albeit at a slower place, the person said. Mr. Best said the cuts would allow the company to hone its focus on product and engineering.

LinkedIn is ineffective at telling us how many employees Substack has because random writers put Substack as their place of business. However, if we assume that it has hired slowly from 77 employees, we can comfortably assume it’s back to approximately 90 people. Assuming all in costs of $200,000 per employee—the CEO did say they were focused on product and engineering—and the business would be on the precipice of breakeven.

If that’s the case, it can take as long as it wants to justify its valuation.

But the big question is whether it ever will. And this is where I find the future for Substack very interesting. If it can hit 10 million subscriptions, it will be generating $90 million in net revenue. That’s obviously a very big if and is entirely dependent on driving growth for its customers, the writers. Fortunately, Substack finally got out of its own way and started investing in what writers needed to grow.

For those that have read AMO for a while, you’ll know I used to publish on Substack and left. One of the reasons was because Substack didn’t know who its customer was. At the time, I wrote:

While not truly philosophical, I believe there is a far more critical problem that Substack needs to account for… who is its customer?

When you come to A Media Operator, you are my customer. I am then the customer to Pico, the CRM/registration system I chose to power AMO’s business. But you’re not actually Pico’s customer. I pay Pico, you pay me, the relationship is crystal clear. I can’t say the same for Substack.

You can learn a lot about who the customer of a business is based on their product development. As new features are introduced, who do they benefit? For Substack, I don’t get the feeling that it knows who its customer is and, therefore, its product development looks a little haphazard.

Substack built a great tool for sending a newsletter, publishing a blog and even hosting a podcast. But then it sort of stopped. It never dove into building tools for audience development. It pivoted its focus to serving the reader. That’s fine, but slow iteration for your primary customer—the creator—is just not great business.

It’s starting to figure it out. Substack launched a multitude of services in 2022. One, which has stood out, is its recommendations product. In a nutshell, you can recommend other newsletters to someone to sign up for and those writers can recommend yours. This helps everyone grow, which is in Substack’s best interest.

One writer who has a little over 100,000 free subscribers told me he was acquiring 1,000 new subs every week from this feature. The question then is how many will convert from free to paid. This will change from site to site, but A Media Operator has about 8% of its audience paying. If that translates across the Substack ecosystem, this writer could be getting 80 new paid subs per week. You can start to imagine how this can scale for Substack.

Now, there’s a big caveat here. We don’t know how engaged these subscribers are going to be for the long-term. When someone chooses to sign up for AMO, it’s because they’ve read the content and then sign up. The inclusion of additional newsletters becomes a spontaneous signup; this reduction in friction might actually result in an increase in long-term churn. We simply don’t know.

What I will say is that the internet is massive. And Substack is a tool that power creators. It is not, itself, a media company, though. It can achieve significant scale by powering non-scale niche newsletters. If we assume Substack has 90 employees and is relatively breakeven at $18 million, what happens when it grows five times? Does it need to grow to 5x the employees? I don’t think so. Unlike a media company, Substack should be able to generate much stronger margins.

Will it ever be worth its valuation? At $90 million in revenue and a $650 million valuation, that’s a 7.2x revenue multiple. Is that fair? In the case of Substack, it’ll all depend on its margins. But with it focusing more on tools for creators, I am more bullish than I have been in a long time.

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