How Substack Fumbled a Billion Dollar Opportunity

And how to avoid doing the same

Hey y’all — I’m sending this to you via beehiiv, the buzzy (sorry) newsletter platform that announced a $33 million Series B this week.

It wasn’t too long ago, though, that another upstart writing platform was driving the newsletter craze.

When I started my newsletter 18 months ago, beehiiv was a tiny new startup while Substack had raised $65 million in their own Series B a year earlier.

I’d like to say it was obvious that beehiiv was the right choice, and I predicted the future, but the truth is it was a hard decision. I labored over it.

But, looking back, it’s clear why beehiiv has been able to capture the market and why they’re likely to be the unicorn that emerges from the newsletter world.

In this week’s issue I break down:

  • When building an “opinionated” product can fail

  • How beehiiv gave control to users to win them over

  • The risks of broadening your vision too quickly

  • How I built my new ghostwriting service based on the same principle

Full disclosure: I invested in beehiiv a while ago after getting to know Tyler, the CEO.

This is May’s free deep dive become a member to get a new one each week and the full library of 90+.

How Substack Fumbled a Billion Dollar Opportunity

Everyone Can Be Wrong All At Once

During the pandemic most people in the startup world held two beliefs about online content platforms that ended up being dramatically false:

  • Clubhouse was going to be the next big social network

  • Substack was going to help everyone start a newsletter

Clubhouse’s collapse became likely in the eyes of many after Shaan Puri argued it would fail, but Substack seemed to have it all for much longer:

  • Creators like Lenny Rachitsky and Packy McCormick became mini-celebrities within tech and built multi-million dollar businesses on the back of their Substacks.

  • Their recommendation network reduced the need for creators to use traditional newsletter paid growth strategies, and created a strong network effect on the platform. Lenny said it was accounting for 78% of his growth at one point.

  • Millions raised from a tier 1 venture firm, among others.

More than that even, they were building an opinionated product that made it simple for anyone to get started writing for free, and they aligned incentives by never charging users and instead only taking a commission when their writers earned via subscriptions.

They believed that this was the best way to help publishers (they call them writers) make money and, initially, it seemed like a breakout hit.

Opinion(ated product)s Can Be Wrong Too

Unfortunately some of their key choices on how to best serve writers dramatically limited their addressable market.

First, a very low percentage of newsletter subscribers convert to a paid subscription (~3% is considered great), prices are low ($5-15/mo), and churn is high. Media subscriptions are just hard to scale.

With their 10% commission, Substack would need to be paying writers $1 billion in order to hit $100M “ARR.” If the average price of a paid newsletter is $10/mo, that means that users would need to be paying for 8.3 million subscriptions. Given a generous 3% conversion rate from free to paid, the platform would need nearly 300 million subscriptions.

The industry has already learned that subscriptions are hard — basically all traditional media publications who set up subscription paywalls have started to return their focus to ads. The NYT (or Packy McCormick) is the exception, not the rule.

And Substack is no different — this chart from their community-funded Series B extension last year looks good at first glance, but when you realize it’s cumulative you can see that the revenue paid to writers per month had not grown much since the start of 2022:

And if you do manage to pull off a successful newsletter subscription on Substack, they’ll take 10% of your revenue. Since there are other platforms out there that take 0%, this makes it extremely hard for Substack to retain the people who are paying them the most money.

The incentives are not as aligned as they seem in the long run.

This is what a publisher would pay every month to Substack vs. beehiiv at various amounts of subscribers, assuming all of their subscribers are on a $10/mo paid subscription:

You can see how this gets silly fast.

Second, Substack aimed to make it easy for writers to just sit down, write, and publish. They didn’t want to burden writers with having to design a newsletter, fiddle with automations, or even decipher many metrics about their posts.

As a result, every Substack newsletter looks roughly the same, and it’s hard for writers to build a business on top of their writing. They just have to hope people really like their writing and decide to pay them for it.

The lack of customization and features is a bug (not a feature).

These two key choices about the revenue model and product design made Substack attractive to people who wanted to get started with a newsletter and not worry about all that other stuff, but left real publishers feeling like the product was incomplete.

They chose to target the market segment that would bring in the least revenue, and this created the opportunity for beehiiv.

Two Visions of the Future

As the venture markets cooled in early 2023, I noticed Substack’s founders began to talk about a bigger vision on X (we’ll get to the irony of that in a second).

Here’s a more recent post that highlights the shift:

Substack was always going to have a challenge growing into the $585 million valuation that they achieved with under $5 million in revenue. That’s a pretty aggressive multiple.

But when they first announced their new mission to make “a new economic engine for culture,” I viewed it as a concession that they were not going to be able to capture the newsletter opportunity.

They’ve since launched podcasts, notes aka tweets, DMs, and more. I urge founders to experiment aggressively, but to me this feels like they’re trying to build an “everything content app” before a single part of it has been a true breakout success.

On the surface it feels like the classic story of hoping that adding another feature will change how much users need your product. That’s just not how startups work.

The problem, of course, is that X is much better positioned to be that “everything content app” than Substack. X has spent almost 20 years building a robust network that has shown its resilience time and time again. Millions of users habitually check it multiple times per day, every day.

It’s an insurmountable lead unless you offer something truly different to begin with that builds that same habitual behavior. has a better chance of disrupting X than Substack. Even Threads does — at least they have the differentiator of woke vs. non-woke.

Beehiiv, on the other hand, has leaned into what publishers want and built picks and shovels for them.

Robust automations, audience segmentation, analytics, a network of ad partners, paid recommendations, a website builder, best in class editor, and custom branding on newsletters… the list goes on.

The Lesson for Founders

Peter Thiel says to dominate a small market before you expand to a larger one, and Paul Graham says the best startups start as “a small, intense fire.”

Substack initially tried to do this, but they either misunderstood the market or focused on the wrong segment.

And since then they’ve gone from building a writing platform to an economic engine for culture (I’m still not sure what that means, to be honest), while beehiiv is just a really good newsletter publishing platform.

The ironic thing is that this will make it much easier for beehiiv to expand into markets besides newsletters.

And this is always the case.

For example, last year many creators spun up ghostwriting services to help people build personal brands on X and LinkedIn. I realized that good content was only half of the equation, and actually the easier half — you also need distribution for that content to make sure the right people see it.

So I built Megaphone and we’ve helped users add over a million engaged followers, with tens of millions of impressions.

Then, last month, I quietly launched a ghostwriting service to our users. It’s at $20K MRR after 3 weeks without mentioning it anywhere else (before this post right now) — you can let me know you’re interested in learning more here.

That’s a much smaller scale, but the same principle.

In beehiiv’s case, their ad network and paid recommendation network are both billion dollar opportunities that they wouldn’t’ve been able to tackle if they hadn’t relentlessly built the features their users wanted first to build up brand loyalty.

And they’ll be able to expand into all email comms eventually.

Newsletters are just a wedge.

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