Someone Always Ends Up Holding The Bag

Substack employees were informed yesterday by CEO Chris Best that the company had laid off 13 of its 90 employees. The layoffs were announced in a memo Best sent to his staff, which was obtained and published by The New York Times' Ben Mullin:

In the memo, Best wrote that he was "very sorry" to be initiating layoffs despite having previously told everyone that the company plan was to "grow the team and not do layoffs." In explaining the decision, Best wrote, "In recent weeks, the macroeconomic outlook has become increasingly uncertain, making it clear that we should be prepared for a period of challenging conditions that could last years." He went on to say that "Substack remains in a strong position" and that the company has "money in the bank."

A few weeks ago, the Times reported on the headwinds that Substack was facing as it tried to secure more money from outside investors. The company, which had already received at least $86 million in funding since its founding in 2017, had reportedly been trying and failing to raise an additional $75 to $100 million, and was valuing itself at nearly $1 billion. Included in that story was Substack's 2021 revenue, which the Times reported to be $9 million. That a company with $9 million in annual revenue found it appropriate to value itself in the neighborhood of $1 billion tells you just about all you need to know about why these layoffs happened.

(Here we must pause to wince at the fact that when Substack's VP of communications, Lulu Cheng Meservey, was asked in May by the Times to comment on her company's recent failures to raise money, she responded, "My comment is www.substack.com/jobs." Yikes! It is possible that no professional communicator has ever been as bad at their job as this woman is.)

Any company with a product and business model as basic as Substack's—creating a platform where writers can sell their blogs to subscribers, and then taking a cut of all the subscription dollars those writers bring in—making $9 million in a single year is a huge accomplishment. That's a lot of money! And Substack has certainly demonstrated that their services can create conditions under which certain writers can earn good or even handsome livings. Substack has inarguably created a money-making business with a sustainable model. So why would it need to lay off 14 percent of its staff?

The problem, at least for the people who call the shots at Substack, is that profitability and sustainability are not enough. The "macroeconomic outlook" that Best put big lights around in his memo refers to the oncoming recession, but I would wager that he's not talking about how the recession might make it more difficult for Substack to sell its product. What he's talking about is how those conditions will, and already have, based on the Times' reporting, make it harder and harder for Substack to scare up eight-figure investments from venture capitalists and other collections of rich people.

Such conditions put Best and the other Substack honchos in a tough position. Those who have already invested millions of dollars in Substack will remain eager for the company's valuation to continue ballooning so that they can eventually make their exit and get a nice return on their investment, but if Substack can't pump the valuation by taking on more money from investors who are suddenly less profligate with their checkbooks, their next best option is to juice revenue. It's unclear how they would be able to do that, exactly. There are only so many Glenn Greenwalds and Bari Weisses out there to join the platform and bring thousands of paying subscribers with them. Taking a larger cut of subscription revenue from their writers is another option, but that would only increase the likelihood of Substack's biggest earners fleeing to competing platforms. Paying more writers to use the platform, as Substack has been doing regularly over the past year, is also a difficult and costly practice to keep up if the venture capitalist faucet has been turned off.

This has all left Best choosing the last resort of all media scoundrels: layoffs, which of course will do nothing in the long-term to get Substack's worth anywhere near the absurd valuation it has set for itself, but will temporarily cut costs and make it look like the bosses are Doing Something in the eyes of their investors.

Nothing about this process is novel; it has played out several times at basically every digital media company you've ever heard of. If there's anything remarkable about Substack going through a relatively sped-up version of the new media lifecycle, it's in how easily it could have been avoided. Substack has explicitly sold itself as a company bringing a bold new vision to the online publishing industry, and much of that vision has been made real. The product is effective! The company makes money! There is perhaps another timeline in which Substack never allowed investors like Marc Andreessen to get their hooks into it, and in that world its employees are currently enjoying the fruits of working at a modestly successful and sustainable business with no need to attempt scaling beyond its means. (This, in Silicon Valley, is sneeringly referred to as a "lifestyle business.") Substack chose a different path for itself, though, and in this one a business model's viability can do very little to relieve the pressure that builds up behind all those zeroes in outside investment. Any release valve that can be opened is going to result in people getting hurt.

The 13 people who lost their jobs yesterday paid the price for their bosses' desire to grow quickly and prioritize chasing a gaudy valuation over steadily developing a business, and they probably won't be the last ones to do so. The gap between Substack's $9 million annual revenue and its desired $1 billion valuation isn't getting any smaller, and unless Best and his pals can figure out a way for their relatively static business model to start bringing in $90 million per year, more people are going to get squeezed. Today it was 13 employees from Substack's human resources and writer support departments. It will be someone else tomorrow.