I think folks are undervaluing for a VC firm the signal value of investing in a hot brand. Even if it isn't a huge exit, sometimes having a great name you can highlight on your website at the top of your portfolio co list will be useful for attracting future LPs or businesses (and if you're not a partner and you work on the deal, you can use the name as an example of a deal you worked on with little impact if the price is too high because you weren't final decision maker)

Are they currently prioritising revenues and profitability?

You could have real estate in the heart of Manhattan that you make $0 on, but that doesn't make it worthless because of the potential of that real estate.

We know highly trafficked websites (and apps) can make billions selling ads. My guess is that investors saw value in the virtual real estate of Substack so that $650m might not be as unreasonable as it seems on the surface.

Valuations are based on future performance, not current performance. If they're going to do $100m in revenue this year then the valuation is perfectly reasonable.

But I'm just guessing. It might be as unreasonable as you suggest. I'm just saying there can be cases when that kind of valuation would make sense if the potential for higher future revenues / earnings exist.

> Valuations are based on future performance, not current performance.

In the public markets, maybe. In the VC markets, valuation is more linked to how much VCs like 'the idea' as opposed to whether they think it could succeed .

Two companies with highly trafficked sites are making great money selling ads.

What next the same introduction to every startup pitch deck ever - “if we capture $smallPortion of $hugeMarket we can be worth trillions”!

Loads of companies make great money selling ads. Sure, most don't make billions in profits, but even apps like Snapchat are able to do billions in annual revenues every year selling ads. And many companies are able to make tens or hundreds of millions selling ads.

Also I was just using ads as example of how digital real estate can be monetised. I'm not a Substack user so I might be mistaken, but I believe most of their revenue comes from their subscription model. The point I was making was just that if you create something that millions of people use whether or not you're aggressively monetising it today, there is still some theoretical value that you can assign to those eyeballs and that engagement.

Snap made a little over $1 billion in revenue last quarter and had a net income of -$360 million. Thads yet another fallacy of the startup mentality (yes I know snap is public). Judging “success” by revenue and not profit. Anyone can sell dollar bills for 95 cents.

Also see Yahoo. Yahoo was one of the most trafficked websites for almost two decades and couldn’t really profit from it after the dot com bust.

Simple answer: it's not.

Same way that WeWork was 'valued' at $50bn, before they revealed their full financials to the public. Then the IPO collapsed; the company was worth $10bn tops, and most of that is in assets they purchased during Softbank's dalliance with Adam Neumann.

The same Adam Neumann that Substack investors A16Z have given $70m to to develop a carbon credits trading blockchain. I shit you not.

Anyone can value any company at whatever number they want. Doesn't mean the rest of the world (or even the rest of the VC industry) shares that opinion. a16z, who invested $65M in their last round, also just gave $70M to Adam Neumann for his crypto startup, so their judgement is anyways a bit suspect.

Simple. By market thinking it is $9M now but anticipating significant increase in the relatively near future.

Not rare at all. A friend recently worked at a company that did $300k in revenue last year and was valued at $750M shortly after! Of course, they laid off like 20% of their staff recently.

Fast raised $100m in January 2021 and went bust a year later, they burned $10m per month and their revenues were like $300k

At least they were named well.

Similar to Pear Therapeutics that SPAC merge announced at $1.6B on about $500k revenue 12 months to date. Professional Analysts put stock target at twice first listing price. Had been around 10 years. Products in market for years. Market cap now $235M.Trading at or below cash.

Wow, that reminds me of Agillion, a dot-bomb which got $40 million of VC investment and $20 million in loans and had "hundreds of dollars" in sales. Plus $200k the founder(s) paid for the code in the bankruptcy.

[1] https://www.dcpartners.solutions/2022/02/agillion-what-was-i...

On the flip side, how does a blog platform cost more than $9M per year?

One big difference. Substack is push, blogs are pull.

Managing the reliable sending of millions of subscriber emails is expensive.

How much?

Mailchimp charges $12K/year for 150K contacts and 180 emails/contact/year.

(Above that is "call us" pricing.)

At that rate, it is about 10c per contact per year. Substack has 500K paying reader-subscribers, 10-20x that in "total readership", whatever that means, and "millions" of readers (but I believe those are web viewers).

https://backlinko.com/substack-users#how-many-paying-subscri...

I would guess mostly marketing—building the brand and the audience. Also recruiting writers to the platform.

Doh, cross-posted the exact same thought!

You pay writers to come to your site and all the other marketing gumph.

I think they gave out lots of contracts to contrarian writers (but just the sort of writer who excites venture capitalists), and assumed eventually the extra eyeballs would turn into revenue.

$9M isn't too much; it's close to a pure play.

ROI: https://www.youtube.com/watch?v=BzAdXyPYKQo