Hacker News Reader

Comment by Barrera | Hacker News Reader

> Substack, which takes a cut of its writers’ subscription fees, generated about $9 million in revenue last year, The New York Times reported. That means the funding discussions valued the company at a hefty premium relative to its financial results. Substack was said to be valued at $650 million last year after the company closed a $65 million funding round.

By any yardstick, a price/sales ratio of 72 is ludicrous. It's the kind of thing that can only happen within the safety of a financial bubble.

View on HN

Look at what happens here in Germany. A job portal for students just closed 45million Euros in Feb this year. They have raised 95m in 7 years. Their revenues in 2019 were merely a couple of million Euros. I can only guess their valuation.

I agree that the ratio is crazy. What if it's still a "content acquisition" phase and only when their sub list reaches some huge N, they will try to figure out to get more money out of it? Or a LOT MORE depending on how shady they are willing to go. I guess, for creators it will be quite painful to migrate.

Definitely a crazy multiplier, but not the craziest on the market given other parameters.

Technically their sales would be the full subscription fees, no? So price to sales would be considerably lower. Your point stands with price to revenue though. That said, Substack has an insane amount of brand recognition for a company that only generates $9M in annual revenue, so it doesn't tell the whole story.

What are they odds they switch to ad-supported when they realize their $9M in rev share is worth less than if they just ran ads?

I hope they succeed, but if they don't - I hope people realize the value of the ad revenue model.

Series A companies routinely get a 100x on revenue. It’s just how things have worked out in the past 5-8 years. I’m not saying it’s right, but that’s the standard for a lot startups. Get to $1m in ARR, and then raise a $10m series A at a $100m valuation.

I wonder how long the VCs want to wait. Can VCs take over and sell the company off to try & recoup their investment?

Very unlikely. They probably don't have the voting shares, and in this market they definitely don't have the buyer. And lastly, don't forget, every single VC involved in this valuation supported the numbers you're reading.

The valuation isn't presuming a "mature" business at a 72x ratio, but rather there is a trend where the trajectory is something more reasonable. Is there a path to $90 million in revenue in the next 24 months? I'm sure there is a slide that shows something like that, which would be a 7.2 multiple.

> By any yardstick, a price/sales ratio of 72 is ludicrous. It's the kind of thing that can only happen within the safety of a financial bubble.

If not 72, what revenue multiples are more appropriate as per the yardsticks you are familiar with?

Single digits, going to low double digits in some industries. Here are a few industry averages: https://eqvista.com/revenue-multiples-by-industry/

One of the industries is Computer Software: Prepackaged Software 112.17% 17.81

And that doesn't take into account that Substack is doubling every 6 months So Substack is 2 doublings or 12 months away of growth from bringing it's multiple to the industry standard, that might be an aggressive evaluation but it doesn't seem insane.

[0] https://www.statista.com/statistics/1243565/substack-paid-su...

* Not to mention most VC deals are sweeter than a pure purchase (in terms of being protected from a down round etc.. *

No it is not. Not when you consider growth.

The whole point of the term "financial bubble" is that an actual bubble is a great example of something that can grow a lot now but whose current growth should not be interpreted as evidence of structural stability or ability to continue growing indefinitely.

What is the point of growth if you can't make a successful business? Legitimate question here. I always had a hard time understanding, especially in regards to companies that are still not profitable or just barely after 10 to 20 years.

Seems incredibly risky and not strong enough to weather any economic downturn.

Are companies just copying the Facebook mantra from 2005ish? Didn't FB become immediately profitable once they started selling ads? That was pre ipo.

Facebook has insane growth, even today. It had double digit revenue growth for over a decade. For instance, in 2021, their revenue grew 35%, the year before, 20%. You'll see similar numbers if you look at their MAU and DAU. With that kind of growth over a decade, pretty much any valuation is cheap today. Sacrificing even a little growth for revenue today is a bad tradeoff because of compounding effects.

https://www.statista.com/statistics/268604/annual-revenue-of...

And what's their profit for that decade+?

A shit ton: https://www.statista.com/statistics/277229/facebooks-annual-...

Similar growth in percentage terms (more actually as they're getting more efficient as they scale and have more user data). Pretty much all facebook numbers are up and to the right.

https://www.statista.com/statistics/277229/facebooks-annual-...

Yeah but you're changing the subject. Obviously if the business is garbage it is garbage. I'm not saying these businesses are good. I'm just saying you absolutely cannot make a blanket statement like "valued at 72x rev is bullshit" if my business is growing even 2-3x a year, it could be ok. In a few years (6-7) if I keep that up my revenue will outpace even my original valuation.

It means nothing to look at revenue and valuation alone.

You could argue the opposite. what's the point of great margins if you have no scale?

look at the Amazon example. they were unprofitable for a very very long time. and the retail business is still very miniscule margins

Please don’t use the “look at Amazon” example. Amazon had positive margins early on and was using cash to buy and build real assets. Amazon also pivoted to an entirely different business where most of its profit comes from - AWS.

No, AWS wasn’t born from Amazon selling excess capacity.

That’s just like saying that if every company rehired its first CEO it could be worth multiple trillions.

> what's the point of great margins if you have no scale

Profit? Niche ownership? Reliability? Durability? Expertise?

It makes sense to worship the Church of Scale in a VC-adjacent forum like HN, but it’s not the only way to business.

The point of profit is profit.

The whole premise of the VC/PE business is profits, just with different risk strategies.

Profit for who? All VCs want is for the company to IPO, because that's when they can get their money back with a nice profit. The company itself doesn't have to be anywhere near profitability to IPO. Look at Uber, Airbnb, Dropbox, etc.

VCs don’t care about profit. They only care about selling to the “greater fool” at unrealistic valuations.

Amazon never made any profit because they were always reinvesting. If they had scaled back to "normal business" levels of ambition at any point they'd have been "normal business" levels of profitable.

Isn't the Amazon the exception that proves the rule

I think the 'successful business' part has become less relevant for investors that are just looking to exit sooner than later. The business model for many apps has become: make a product > obtain users > get hype > IPO > exit. At the exit portion, the product gets littered with ads, competition starts to catch up, and the product begins to decline.

Obviously this is pretty reductive but this is generally what I have seen as a user of many apps in the past 10 years.

> What is the point of growth if you can't make a successful business?

Ideally? To leave retail investors and pension funds holding the bag when it all blows up.

Well the considerations of growth were wrong and that's why people are getting laid off.

Growth where more growth leads to greater and greater losses, this sounds like 2000 all over again. You know what they say, those who don't learn from history are doomed to repeat it.

the movie pass strategy. Sell people 2 dollars for 1 dollar and experience fantastic growth. Growth is irrelevant if you're not making money, in fact growth in that case means you burn it faster.

Hopefully with the end of the easy money era this ridiculous business model dies out for good.

How are they selling $2 for $1? It's pretty much all employees. How many engineers do you need to support the platform? Probably not a lot. The other expense is paying upfront for content, but a few of the accounts I follow they did this for (e.g. Matthew Yglesias), they came out ahead (e.g. guarantee $250k a year while netting closer to $1 million for subscriptions) [0]. They can cut this out as well if they had to. Their platform is still strong.

They just need to scale back their hiring excesses and bullshit jobs likely created.

https://www.politico.com/news/magazine/2021/04/16/how-substa...

>How are they selling $2 for $1?

the only value of the platform is in the creators, any team of devs can clone the product in a month. You're exactly right that they need barely any employees, because the technology isn't worth anything. The site has no moat or network effects so they will effectively need to subsidize the creators forever or not charge them anything, lest they run for the next platform.

It's the same reason the ridesharing industry is a profitless money pit. Undifferentiated, easily copiable products compete each other into the ground on subsidized investor money while owning no assets of value.

The USP would be their integrity. The vast majority of cloned sites would be looking to make a quick buck and would sell out their creators in a second. If Substack can prove they understand which side their bread is buttered and show some loyalty to their creators and not get too greedy, then I feel like it could be quite sticky. Of course they are likely too deep into the VC money to pull it off, but one can always hope!

You can say the same thing for many saas companies. Anyone can clone Twitter, Facebook, Instagram, etc. But there are network effects. I like substack because they have a free tier and easy monetization. If I were to monetize I'd probably go with them due to ease of monetization, their interface, transferability, etc. The differences between fees in competitors is probably negligible.

It's differentiated to something like Medium because I know I won't get ads, pop-ups, arbitrary paywalls, cheesy SEO content, etc.

Growth is irrelevant if your gross margins are negative. But I'm 100% Substack has fantastic gross margins.

True, but the distinction is revenue-to-cost per unit of growth.

s/Not when you consider growth/Speculate an unknowable future to empower finance markets

growth? How many $5 subscriptions are people going to pay for factless opinion pieces by self-proclaimed experts of everything like Glenn Greenwald

Precisely. They won't be able to build an independent business off $5 and $10/mo subscriptions per user.

I worked at an energy trading desk some years ago, and market intelligence there came through hyper-focused industry newsletters, with crazy high subscription prices. It's like a Bloomberg terminal, or a Photoshop subscription: only worth subscribing if you are making several multiples of the cost back in profits.

Substack's litany of 'investing' newsletters is basically a mommy blog version of that. Newsletters can't charge very much because we all know this stuff is available elsewhere, in higher quality. And non-financial newsletters probably can't charge at all, other than the small handful you see on their "Featured" page.

72x revenue is ludicrous even for SaaS standards in a bloated economy (circa Q3~Q4 2021) and considering growth.

It is not blanket ludicrous. Not at all. If you expect the company to grow 100x next year, for example, it is not crazy at all. That's the extreme, but for example if they are valued at $72m and 72x revenue, and grow 100x the next year, now their revenue is $100m. That's great.

Reply on news.ycombinator.com