News broke yesterday that Substack, the popular newsletter publishing tool, canceled fundraising plans for a Series C after an increase in its price target failed to materialize. The company’s revenue base, compared to valuation hoped, was too small to support the numbers the startup had in mind.
This is not a unique story. Many startups that raised at high prices last year will run into problems trying to raise capital at new, higher valuations. The Why in this case has been the topic of conversation in technology circles for months. In short, the market conditions that led to a venture capital bonanza last year have slowed or vice versa, leaving many startups stuck on private market valuations that no longer translate into current investor interest.
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Substack strikes a belligerent tone with media coverage of his fundraising exploits, telling The New York Times — which broke news of the company’s Series C attempt — that his commentary on the story was the jobs page. Sure, Substack still has capital and is hiring, but that it wanted to raise more money is also illustrative.
The Substack Series C saga is a great time to refresh ourselves on how much the market has changed. And what’s more, we can go back in time and examine our past coverage of the company’s finances by reviewing what we calculated when it last emerged. Everyone will look a little crazy, so let’s get started!
Recall that Substack last raised a $65 million Series B against what PitchBook described as a $675 million retrospective valuation. Here’s the latest news from the Times on what the company wanted to raise in a Series C:
Substack has been in talks with potential investors in recent months about raising $75 million to $100 million to fund the growth of his company, the people said, wishing to speak anonymously only because the conversations were private. Some of the fundraising discussions valued the company between $750 million and $1 billion, they said.
Notably, if Substack had raised $75 million at a $750 million post-money valuation, it would have effectively been a flat round of its Series B. That that valuation seems out of reach today implies that the only way Substack could raise a new round of equity financing would be with a valuation cut. Down rounds aren’t popular, so it’s no surprise that the company has put its fundraising plans on hold for now.
Why did Substack struggle to attract high eight to low nine digits against a nine to ten digit valuation? Because it had seven-figure revenue last year, the Times reports, writing that “Substack has told investors it had revenue of about $9 million in 2021.”
With that nugget, we can do some interesting math: