This notes thing looks like an attempt to pivot to an advertising based business model and I'm guessing they think they have "influencers" on their platform to bring in a decent audience.
It's not. Substack is very clear about that. https://on.substack.com/p/notes-faq
"The ultimate goal on Substack is to convert casual readers into paying subscribers. Because the Substack network runs on paid subscriptions, writers are rewarded for respecting the trust and attention of their audiences, not exploiting it like with ad-based social media."
"While Notes may look similar to social media feeds, the key difference is in what you don’t see. The Substack network runs on paid subscriptions, not ads. It’s social media with a heart transplant."
Would they?
No business would pivot to a dying monetization model unless it was their last option.
Advertising is not a solution for Substack; but rather a Trojan Horse.
If I spent 30% of my net worth I could buy a condo in the bay, possibly. Although odds are it would be worth close to that if I needed to sell it.
But many people spend 30% of their net worth trying to start businesses with almost no traction. Musk spent 30% to buy something known internationally.
That sounds like one of the least interesting things I could do with $44bn.
With that sort of money I could fund 1000 Twitter rivals, and after a couple of years combine the successful and interesting ones into a single rival that would actually do something better than Twitter.
You could fund The Manhattan Project ($21Bn).
And the Panama Canal ($13Bn).
And the Concorde project ($2.5Bn).
And the Hoover Dam ($0.8Bn).
And an Eiffel Tower, a Statue of Liberty, and a statue of Christ the Redeemer. ($100s of M)
Buy yourself a B52 Stealth Bomber (~$2Bn).
And a Hindenburg ($100M), and a Titanic ($400M).
And still have a couple of billion left over.
Musk spent 30% of his net worth on it then immediatly burned 90% of the already questionable value it had.
What Musk did was just bad business.
citation needed
[0]: https://www.bbc.com/news/business-65084254
[1]: https://twitter.com/ZoeSchiffer/status/1639737042828673024
That doesn’t make it a good idea.
I actually find it perverse.
Further he was misled by someone feeding him incorrect information and promptly apologized for the confusion. https://twitter.com/elonmusk/status/1633253950198624257
Given he continues to talk with the man at times (he replied to one of his tweets the a few days ago) and there's no evidence to support the idea that he did it for monetary reasons, other explanations are much more reasonable. Namely that it was a simple mistake.
1. I care pretty strongly about the truth. When I see people actively spreading incorrect information whether through malice or their own misunderstanding I think it’s important to correct it to prevent the deception of others, especially when it’s happened on such a wide scale. He himself doesn’t seem to understand that it’s important to correct this type of thing early so there’s no other option.
2. I care because a lot of the future depends on the success of Elon’s companies and people use tearing down Elon as an excuse to attack his companies. They’re doing amazing things for the future while being constantly attacked for it.
So it’s a double-whammy of self interest and my own internal mental obsessions.
I like Musk because he doesn't appear to be a woke tool. Is he a tool of a different kind? Probably. But I don't like woke, so I stick up for the non-woke. Is he perfect? No. None of us are.
(I don’t think you’re wrong by a factor of 10, just curious where you got your number from.)
When will we realise that blogging websites (not personal blogs) are not sustainable in long run.
This is a classic case of VCs corrupting an industry with money that’s really not needed at valuations that really can’t be supported.
Advertising works there because of the numbers. People will quickly consume enough bite sized content to drive traditional numbers.
Medium broke the things that made them appealing in an attempt to sweeten the advertising sell, but this made the platform unappealing. It was a self inflicted wound.
To be more specific, advertising works there because of the feed algorithms. The platforms gather data about user interests and use that to tune what they choose to show the users, favoring things the algorithms suggest will get more "engagement". In turn, they sell ads on those favored items. On top of that, they charge both users and advertisers a premium to be featured on the favored topics.
Take away the algorithms that determine what content and ads to feature, and you get back to the basics of blogging websites. You get happier users, but no advertising money.
Substack is already far, far more paywalled than Medium ever was. Subscriptions are the business model.
Source:
https://www.sec.gov/Archives/edgar/data/1783191/000167025423...
I’d edit the post but it’s too late to do so.
- Infinite scrolling feed w/ ads
- Video Substacks
- Infinite scrolling video Substacks w/ ads
Sorry to get off-topic, but is there a read/book to understand funding, VCs, etc., from a holistic POV. I totally didn't expect that consequence of having to raise a crowd sourced round due to initial high valuation.
- If you raise more money at a lower valuation than your last fundraise, it's highly dilutive. Investors paid $10 for 10% of a $100 valued company last round during the bubble. Vs. given current market conditions, new investors would only pay $10 for 20% of a $50 valued company this round. This second round would dilute existing investors, except...
- If you crowd source the funding, now you can raise at a $100 valuation again (less dilution), because these crowdsourcing investors don't know what they're doing
“The Power Law: Venture Capital And The Making Of The New Future” is also good. It tells the story of the evolution of VC over the last 70 years. It is interesting that funding terms seem to be becoming more and more founder-friendly over decades.
Was recommended to read this by VC friends to prep for Investment Associate interviews a couple years ago
The game works like this: the VCs want 100% of your company, and you want to give away 0% of your company. (Of course, 90%+ of companies will fail, so it doesn't really matter. But let's pretend we're all in that special 10%.)
If you do end up choosing to play that particular game, then you'll find some common numerical rules of thumb. They usually go like this: Each round should raise 12-18 months of runway, and each round's investors usually get about 20-30% of your company.
On one side of the game, you have the VCs, who basically play this negotiation full-time — and whose comp structure depends on extracting as much equity from you as possible. This is why we get the constant stream of "thought leadership" from VC bloggers, because they're trying to distinguish themselves as offering something more than capital. (And, having distinguished themselves, they can extract more % from you for less $.)
After decades of practice, VCs have plenty of hustles they can run. Some of the classics are the old "participating preferred" play, as well as the usual sound bite about how "it doesn't matter what the exact numbers are."
On the other side of the game, you have the founders, who basically want the maximum amount of money in exchange for the least amount of equity — but also for the least amount of time. Fundraising is a massive distraction, and VCs know it — which is why time always gets used against the founder, with long and drawn-out "fundraising processes" that (by total coincidence, of course) also happen to exhaust the founder and push them towards signing.
The twist is that this game isn't only for 1 round. Once you take your company into this game, you're stuck in it — you'll have to keep fundraising to keep fueling the growth that you've kickstarted using external capital. With the average IPO timeline being 7-10 years, combined with fundraising every 12-18 months, you can expect to play this game 5+ times on the way to IPO.
Sometimes, for a variety of reasons, the founder raises too much $ for too little %. You'd think this is a good move — but, since this is an iterated game, it's not all upside. Decisions in this round set the stage for the next round. If you can't live up to the growth expectations implied by the high valuation, then you're in for a "down round."
VCs have a standard "down round" playbook, too. They'll have their way with the cap table, of course — and it's also not uncommon to see some/all of the founding team shown the door. The press piles on as soon as they hear of it, which drags on employee morale as well as the talent pipeline, both of which then destroy product velocity and market positioning... it's very easy to have a single "down round" be the kiss of death for a company.
So that brings us all the way back around to your question. For this particular company — as well as for many others that raised during the "cheap money" era of the pandemic and pre-pandemic years — it sounds like they're facing this conundrum. Crowdsourcing the next round is a somewhat new way to tackle this situation — new regulations came out a few years ago, and founders sometimes go this route instead of risking the "down round" game with VCs.
You usually only see B2C companies making the crowd-funding play in the first place, since you need the name recognition and customer base to even try to raise money in this way. Because founders can essentially "divide and conquer" their investor base in a scenario where everyone's investing only four or five figures, the common scenario here is that the founder sets the terms to avoid the down round — and then they begin the fundraising. Since they're fundraising from hundreds/thousands of people instead of 5-10 people, it ends up being more of a marketing campaign rather than high-touch sales, which can also play to some founders' strengths.
Anyway, I could keep riffing for a while (and I'm sure others here could do even better). I'll let the other commenters chime in with book recommendations — I'm sure someone's written about these market dynamics in much more detail.
- VCs don’t want founders to own 0% of their company because founders need to be motivated to work hard to make it a success
- % of dilution usually goes down very significantly over funding rounds
- there is significant competition between VCs to fund good startups these days, which can translate to founder leverage
- there are early-stage VCs these days, which don’t pressure founders for quick growth
- founders talk to each other and a large portion of founders are serial entrepreneurs. Reputation among founders matters to VCs
- looking over the longer term of decades, typical funding terms are getting much more founder-friendly
That's really interesting. Do you know how they make that work, exactly?
I feel like that's naturally opposed to the standard incentive structures that VCs have with their LPs. They need to show results in O(years) so they can raise their next fund and keep the overall VC firm going over O(decades). That maps down straightforwardly to the day-to-day pressure VCs put on all their portfolio companies to grow as fast as possible.
Unless early-stage VCs are doing something new with the terms they give their LPs, how could they prioritize anything other than growth?
If the startup is showing good growth metrics, they'd point them to friends at later stage funds. If they aren't, they'd give intros and help get the startup aquihired.
Why? What stops you from raising a $15m series A and only burning it conservatively until you hit neutral profitability. Investors only have 15-25% of your cap table and can't strong-arm you.
You can be a stable, profitable, money-making machine with 90+% margins and amazing reviews, but unless you're doubling something (users, engagement, profits, etc) every single year, you go to the back of the potential-investment line.
A high initial valuation might be great for performance relative to other companies (or whatever reasonable metric you want to insert here), but it also makes it way more difficult to show "growth" YOY compared to a lower initial valuation.
The announcement for the feature on twitter[1] literally emphasizes the lack of ads, pointing out subs are their revenue source, so that would be some 4D enshittification chess.
[1] https://twitter.com/hamishmckenzie/status/164362995302659686...
Guessing that’s now how they’ll pitch it to an acquirer once it takes off.