Many critics (especially those in media) have been questioning Substack's $65m raise.

"Why raise so much capital??"

I think it's genius. Here is why:

[THREAD]

Substack has done an incredible job at 2 things.

1. Building the easiest way to start a newsletter
2. Building a brand

Substack is the Kleenex of ESPs. Many even use the terms "Substack" and "email newsletter" interchangeably.

However, Substack's product is currently a commodity. This isn't a knock on the product, they are early!

However, they take a % of revenue, whereas many competitors take a flat rate.

For example, Ghost is a much better economic alternative.

As you scale on Stack, the economic disadvantage to being on Substack gets big.

A $100/year newsletter with 5,000 subs would pay ~$50,000/year for the service.

The same newsletter on Ghost would pay ~$250/year.

So how does Substack build an economically viable business where creators don't leave for a cheaper alternative?

2 ways.

1. Stay lean and bootstrap! This is a huge market, and definitely does not have to be a winner take all
2. Help writers generate more revenue.

When they took $15.3m in series A funding from a16z in 2019, they threw #1 out of the window. They need to go BIG + OWN the market.

So now, all focus is on #2. How can SS help writers make more money?

Substack has 2 options for helping writers make more money:

1. Discovery: Help writers open up their top of funnel by bringing them traffic
3. Help them convert a larger % to paid

So how do they do either of these?

This where the $65m comes in

Substack is going to blitzscale the content creator world via the Substack Pro program. Not just journalists -EVERYONE. Millions of dollars

If you have an audience, Substack is going to offer you an advance to leave your job and start a Substack.

This will do 3 things.

1. Bring writers to Substack who otherwise wouldn't want to take that risk
2. Bring a lot of new readers to SS
3. Generate a ton of brand awareness

So why do this?

These contracts are temporary after all... Once their advances are up, they are allowed to take their audience elsewhere. They own the emails!

A few reasons...

First, they may try to turn SS into a consumer brand.

As @benedictevans has pointed out, Substack can leverage big names to become a consumer brand. They will try to get users to show up to Substack dot com.

This will bring writers net new subscribers vs. porting their audience over from Twitter.

All the sudden, Substack is helping you grow your list... Discovery....

All the sudden, the 10% fee may start to feel cheap.

The second reason to raise $65m for creator advances is for bundling.

Can Substack figure out bundle economics? Can they find multiple newsletters to bundle together and convince people to pay who otherwise wouldn't?

Only time will tell, but they definitely can't without enough writers on the platform.

Tough to bundle if you don't have much to choose from.

Having thousands of successful writers on the platform gives them the data they need to test bundling.

So, do I think Substack will become a multi-billion dollar business and transform the media industry?

I'm not sure. But, once you get on the VC treadmill, you can't get off. Raising the $65m to offer advances to hundreds of successful writers is the right move.

A few additional thoughts:

The substack opportunity is not to poach 1m journalists but rather to create 1m new content creators

One way I like thinking about the TAM:

If they can get 2500 writers to 2500 paying subscribers at $150, that’s 100m ARR.

Getting there doesn’t seem *that* though. Staying there does.

More tweetstorms like this here. https://twitter.com/austin_rief/status/1339411082063060992?s=20