Substack's conundrum

One of my sensible rules for life is if you’re invited to a party in Paris, you go. I happened to be here during what is apparently over 100 fashion weeks that take place during the year. The party, held in an 18th century mansion, was ostensibly to celebrate the 20th anniversary of Highsnobiety, the streetwear media brand. I found it a glimpse of the future of media. The party was filled with influencers, athletes and Very Cool Young People and sponsored by Ray-Ban Meta. Highsnobiety’s latest book, a thick tome on creative collaborations, was available, but the hot ticket was the A/R glasses. 

Highsnobiety, now owned by European e-commerce giant Zalando, acted as the glue to give Meta a dose of cool it cannot get through Mark Zuckerberg’s stylist. The future of much of the media business is along these lines. Putting on good parties is a core competency now. 

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Substack is a consequential company in the rebooting, if you will, of media. It has emerged as shorthand for the decentralization of media. News that a prominent journalist like Derek Thompson is leaving The Atlantic for Substack is almost expected. The breakout success of Substack stars like Lenny Rachitsky, Helen Cox Richardson and Emily Sundberg is tangible evidence of its importance as one of the leading creator platforms of this next phase of media.

And yet, Substack is something of a frustrating company. It rose to prominence as an email newsletter platform, yet its email functionality isn’t great. It has poured resources into an app that’s still buggy – and uses its writers for distribution. Its monomaniacal focus on subscriptions as the only revenue stream it powers is nonsensical. It has yet to make strides in smart bundling that can get around the reality that people will only take out so many subscriptions. I would expect some kind of Substack One Max Pro Plus pass is inevitable. 

And as a business, Substack has yet to prove that it's a great one. It was fitting that a Substacker, Eric Newcomer, reported Substack is returning to the capital markets to raise a round. This comes two years after Substack scrapped a funding round based on tepid demand and turned to passing around the hat to writers, of all people. Substack is still a relatively small business with just $45 million in revenue after raising over $80 million. 

As Anonymous Banker put it in the next episode of People vs Algorithms, Substack’s proven itself as a culturally significant company that is not an operationally exceptional business. This isn’t helped by being in media, which investors sensibly do not view with much enthusiasm. 

“Where they need to fix the business is to actually generate revenue that's detached from taking a toll on the subscription and have an additional lever or two where they can basically create additional value for themselves,” AB said.

It’s telling to AB that a powerhouse backer like Andreessen Horowitz hasn’t rammed through the needed financing. After all, it has all the data on the company and would know best whether it can live up to a lofty valuation of $700 million. 

“When you have an investor like that who sits on your board, who's in the cap table, they should be your biggest cheerleader because their value is tied to the company raising more money and continuing to grow. It’s a really interesting tell.”

Unsurprisingly, Eric reports that part of Substack’s pitch is that it will expand into sponsorships. Imagine. I guess in the VC game it’s better to sell potential than reality, but this is long overdue. Substackers are already making money off subscriptions and other ways without Substack’s help. Eric himself is a good case. His events business is bigger than his subscriptions revenue. Lenny Rachitsky has several business lines that Substack doesn’t enable. 

Personally, I made the decision to leave Substack for Ghost mostly due to the inability of Substack to do the basics necessary for the kind of B2B business I’m running. I’d have preferred Substack built out a landing page tool and lead generation capabilities, even a webinar functionality. I find it telling that the most successful Substackers typically have duct-taped together a bunch of tools. My concern was that Substack would be forced to make decisions – like trying to build a social network – that would be in its interests to live up to a lofty valuation as opposed to mine.

It would have helped if Substack managed to build its own or have an app store that allowed publishers to easily add tools that suit their businesses. I’ve long felt you either have to build a business on a platform, or build a platform around your business. 

All that said, Substack is a remarkable platform. It has allowed many to build significant media businesses, and it has managed to mostly keep the quality of content on the platform high. There are many email platforms – I’m an angel investor in Beehiiv, so keep that in mind – but Substack has mostly remained the most popular for high-profile people. That creates a virtuous cycle, but not one that lasts forever. 

I’m most interested in how Substack evolves beyond text. We publish the People vs Algorithms podcast and newsletter on Substack. We haven’t yet used its livestreaming tools. Text will remain a preferred mode for many, but Substack will need to strike the balance of being more multimedia without losing its original core.  

“They have what you need to succeed, which is they have all the best talent,” AB said. “They have a platform that doesn't charge that much. It doesn't make sense for you to leave the platform. So a lot of things are aligned. They just have to execute. And I think there's a bunch of questions around their execution.”

For more on Substack’s future, check out tomorrow’s episode of People vs Algorithms