Is Substack Worth $650 Million? Valuation Analysis

Substack Secures Significant New Funding

While not the originator of the paid newsletter concept, Substack has achieved notable early success with this model. This accomplishment is now prompting existing investors to substantially increase their financial commitment to the media startup.

Investment Details and Valuation

According to a report from Axios, Substack is currently in the process of securing $65 million in new venture capital. The company is being valued at approximately $650 million during this funding round.

Axios also indicates that Andreessen Horowitz (a16z) is anticipated to lead this investment.

a16z's Broader Strategy in Alt-Media

It is not unexpected to see a16z increasing its investment in the so-called alt-media landscape. The firm is actively expanding its internal media initiatives.

Furthermore, a16z has allocated capital to various audio-focused social media platforms, including Clubhouse. Their internal publishing efforts represent a strategy to circumvent traditional media outlets.

Substack's Impact on the Media Landscape

Substack has become a destination for established writers, leading to a shift in the center of gravity within the media industry.

The platform has attracted talent from established publications, altering the dynamics of content creation and distribution.

Analyzing Substack's Growth and Valuation

Substack’s recent valuation and the associated investment are noteworthy. This analysis will gather data regarding the company’s historical growth.

The goal is to provide a comprehensive perspective for evaluating the new valuation.

Key Takeaways

• Substack is experiencing rapid growth in the paid newsletter market.
• Andreessen Horowitz (a16z) is a key investor, signaling confidence in the platform’s potential.
• The investment reflects a broader trend of venture capital firms investing in alternative media.

The platform’s success is reshaping the media landscape by attracting prominent writers and challenging traditional publishing models.

Understanding Substack’s growth trajectory is crucial for assessing its current valuation and future prospects.

 $650 Million Valuation?

Let's begin with a brief historical overview. According to Crunchbase, Substack has received a total of $17.4 million in funding to date. PitchBook reports a slightly higher figure of $21.21 million, including debt. Both sources concur that the company’s latest funding round occurred in July 2019.

PitchBook estimates the company’s valuation at $48.65 million as of that time. Having secured $17 million in funding approximately 20 months ago, the company likely expended a significant portion of those resources. Therefore, seeking additional funding is a logical step.

However, the magnitude of this new round is particularly noteworthy, as is the resulting valuation. While Series A and B funding rounds have generally increased in recent years, a $65 million Series B would be substantial, even considering 2021 market conditions. This figure is significant enough to warrant attention, especially given the widespread recognition of Substack.

The company’s intended use of these funds is readily apparent. The platform requires further development in numerous areas. Competition from entities like Ghost, Twitter’s Revue, Facebook’s newsletter initiatives, and Forbes’ own paid newsletter program is intensifying. Substack will need to match their diverse feature sets.

A substantial capital reserve will empower Substack to attract top talent, particularly prominent writers capable of generating significant revenue for both themselves and the platform. Offering several hundred thousand dollars to secure a well-known writer may be costly for a startup still utilizing funds from its 2019 Series A round.

However, $65 million would provide Substack with the necessary capital to expand its engineering team and continue attracting skilled professionals. The question arises: why would a16z be willing to invest $65 million for a 10% stake in the company?

Is Substack currently generating revenue commensurate with its valuation? Let’s explore this further.

• Substack’s Business Model: Media B2B SaaS. Substack provides its software to writers, taking a 10% commission on their recurring revenue. These writers, in turn, sell subscriptions to their newsletters to readers. The writers are the direct customers of Substack.
• Implied Gross Margin Range: Robust. As a software-as-a-service provider, Substack likely benefits from software-like margins. While the exact margin level is uncertain, it’s reasonable to assume it exceeds 65%.
• Substack’s Growth Trajectory? Let’s analyze.

Now that we’ve established a SaaS framework, we must assess revenues and growth rates. This will allow us to determine whether a16z’s investment is justified by Substack’s current performance.

Here’s a timeline of Substack’s subscriber growth:

• July 2019: 50,000 paying subscribers (Nieman Lab).
• March 2020: 100,000 paying subscribers (TechCrunch).
• December 2020: 250,000 paying subscribers (NPR).
• February 2021: 500,000 paying subscribers (Bloomberg).

Such rapid growth explains a16z’s willingness to invest further. If the firm saw potential with 50,000 subscribers, its confidence must be even greater with a tenfold increase in less than two years.

To illustrate, let’s make some assumptions. Suppose each subscriber maintains an average of 1.2 paid subscriptions, and the average monthly cost is $7. This would translate the subscriber counts into the following gross merchandise volume (GMV):

• July 2019: $5.04 million.
• March 2020: $10.08 million.
• December: $25.2 million.
• February 2021: $50.4 million.

These figures can be adjusted by modifying the average monthly fee or the number of subscriptions per subscriber. Regardless, a gross figure will be generated. From this, calculate 10% to determine Substack’s net revenue based on your assumptions.

Our objective isn’t to pinpoint Substack’s current size, as that requires more data. However, we’ve demonstrated that it’s improbable that Substack’s GMV exceeds $100 million today, or twice our initial estimate. Consequently, the company’s revenue likely doesn’t surpass $10 million in annual recurring revenue (ARR), considering its 10% commission on writer earnings.

At a $650 million valuation, Substack is trading at 65 times its current ARR. This suggests that a16z is anticipating substantial future growth. In other words, the venture capital firm expects Substack to expand its half-million subscriber base to 5 million. At that scale, Substack would become a significant player, generating substantial GMV (potentially $500 million or more) and revenue (potentially $50 million or more).

Additional capital will facilitate the achievement of these goals. The recent success of Substack in attracting a single writer with a $250,000 offer provides a case study. As Peter Kafka noted, the relationship with Matt Yglesias is projected to generate over $100,000 for Substack in his second year.

Increased capital allows for the execution of more similar deals. At a minimum, a16z is betting on an abundance of both supply (more writers like Yglesias) and demand (more subscribers). A tenfold increase is anticipated. If you share this optimistic outlook, Substack’s growth justifies the new capital and its valuation.

However, the context of 2021 fundraising dynamics suggests that valuations may be inflated by a factor of two. Further updates will be provided as this funding round concludes.