Substack Drops Fund-Raising Efforts as Market Sours

Substack, the ballyhooed newsletter platform that has lured prominent writers with the promise of cashing in on their relationships with readers, has dropped efforts to raise money after the market for venture investments cooled in recent months, according to people with knowledge of the decision.

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

The decision is another sign of the stark shift from the recent go-go years of free-flowing cash for young start-ups, particularly buzzy, consumer-facing ones like Substack, which has raised at least $86 million over three rounds of funding, according to PitchBook, which tracks funding.

Now, investors are preaching austerity and halting new deals, particularly for companies that spent aggressively on growth with no signs of profits. Though Substack is still hiring, other firms have grappled with layoffs or lower valuations, with some comparing this downturn to the years after the 2008 financial crisis or 2000 dot-com bubble.

A Substack spokeswoman, Lulu Cheng Meservey, declined to comment on the company’s financials or any funding conversations. She said the company continued to be in growth mode, pointing to a webpage with more than a dozen job listings, including a head of growth.

“My comment is www.substack.com/jobs,” she said.

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

Substack has told investors it had revenue of about $9 million in 2021, the people with knowledge of the fund-raising talks said, meaning that the discussions valued the company at a hefty 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 firms were more bullish on start-ups.

The company has pitched itself as an alternative to established publishers of news articles, graphic novels and books. Substack says that it gives writers a more fair share of the revenue from their work. The company takes a 10 percent cut of the total revenue paid to writers by subscribers to their newsletters. Stripe, Substack’s payment processor, takes another 3 percent.

The company has won over influential writers including the journalists Matthew Yglesias and Glenn Greenwald, and Heather Cox Richardson, an American history professor. The company’s executives have said that more than one 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 won over by Substack’s pitch eventually decided to leave the platform, preferring to court their audience directly without paying the company its cut. Others were disenchanted by the company’s hands-off 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 does not moderate content, but its paid hosting service has some restrictions for content that calls for violence or otherwise breaks the law.

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

Substack is among a group of start-ups that started to thrive in the pandemic, and investors began fighting to pour money into them at soaring valuations. But by 2022, some so-called pandemic winners, like the audio app Clubhouse or the grocery delivery service Instacart, have seen their explosive growth begin to slow as people returned to their daily routines.

Broader economic forces, including higher interest rates, ballooning inflation and the declining stock market, compounded the gloom.

Erin Griffith contributed reporting.