Substack cuts fundraising efforts as the market tightens

Substack, the swashbuckling newsletter platform that has lured prominent writers with the promise of cashing in on their reader relationships, has abandoned efforts to raise funds after the venture investment market has cooled in recent months, according to people. aware of the decision.

Substack has been in discussions with potential investors in recent months about raising $ 75 to $ 100 million to fund the growth of its business, people said, who would only speak anonymously because the talks were private. Some of the fundraising discussions valued the company between $ 750 million and $ 1 billion, they said.

The decision is another sign of the marked change from recent years of free movement of money for young start-ups, especially vibrant, consumer-facing ones like Substack, which raised at least $ 86 million in three rounds of funding. according to PitchBook, which tracks funding.

Now, investors are preaching austerity and blocking new deals, particularly for companies that have spent aggressively on growth without profit. Although Substack is still hiring, other companies have been struggling with layoffs or lower valuations, with some compare this decline in the years following the financial crisis of 2008 or the dot-com bubble of 2000.

A spokesperson for Substack, Lulu Cheng Meservey, declined to comment on the company’s financials or any financing conversations. She said the company continued to be in growth mode, pointing to a webpage with more than a dozen job postings, including a growth manager.

“My comment is,” he said.

The investment terms under discussion for Substack would have represented a leap in the company’s valuation, which would have reached $ 650 million last year after the company closed a $ 65 million funding round from investors including Andreessen Horowitz. .

Substack told investors it had revenues of around $ 9 million in 2021, people familiar with the fundraising talks said, meaning the discussions have valued the company at a high premium relative to its financial results. Such a high valuation for a company with relatively small revenue was more common in the latter months of 2021, when the stock market was booming and venture capital firms were more bullish on startups.

The company has proposed itself as an alternative to established publishers of news articles, graphic novels and books. Substack says it offers writers a fairer share of their work’s revenue. The company takes a 10 percent cut in total revenue paid to writers by subscribers to their newsletters. Stripe, Substack’s payment processor, takes another 3%.

The company has won over influential writers including journalists Matthew Yglesias and Glenn Greenwald and Heather Cox Richardson, a professor of American history. Company executives said more than a million people pay to subscribe to newsletters on its platform and that users pay more than $ 20 million a year to subscribe to Substack’s 10 most popular writers.

But some writers who were initially hooked by Substack’s speech eventually decided to leave the platform, preferring to woo their audience directly without paying the company’s share. Others were disappointed with the company’s hands-on approach to moderating content on the platform. Last month, The New York Times reported that some newsletter writers were exploring alternatives like Ghost, a platform that provides similar services to Substack. Ghost’s open source publishing platform doesn’t moderate content, but its paid hosting service has some restrictions on content that requires violence or otherwise breaks the law.

Substack is also facing stiff competition from major tech companies, along with many of the media companies it is trying to compete with. Twitter, LinkedIn, The Atlantic and Puck, a start-up founded by Jon Kelly, former editor of Vanity Fair, all use email newsletters as a channel to engage and make money with their audience.

Substack is part of a group of start-ups that began thriving during the pandemic, and investors began to struggle to pour money into them with soaring valuations. But by 2022, some so-called pandemic winners, like the Clubhouse audio app or the Instacart grocery delivery service, saw their explosive growth start to slow down as people got back to their daily grind.

Broader economic forces, including higher interest rates, rising inflation, and the falling stock market, have compounded the gloom.

Erin Griffith contributed reportage.

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