Pre-IPO Investing Ideas: Substack
Substack is a hot media property at the moment. The private company is a media platform on the internet, for journalists, artists, writers, and anybody else who has something to say. Some famous journalists (like Matt Taibbi) are on Substack, in part because the company respects his freedom and allows him to publish what he wants. If you’re reading this, you’re on Substack, too!
While journalism has always been political, and thus has always been biased, many people have been blind to these biases. The internet has opened up the media airwaves and has created new fortunes that way. The internet increases optionality -- it's a democratic force that gives many, many people a soapbox.
Substack is a "platform" company and is valuable because of its brand ("smart people are writing on Substack") and diversity of opinion on the platform. I put "diversity of opinion" in bold italics because traditional media companies have smart people writing for them, but smart people can be dismal failures at recognizing their own biases and capacity for being wrong.
That's why diversity of viewpoints is so critical. Other smart people might disagree with you. And the failure to hear other points of view makes your own arguments or beliefs a lot more vulnerable to being wrong. You're not in the "marketplace of ideas" when you censor speakers and shut them out. Censorship is a bad political model and a bad economic model, too.
This is why trust in elite journalism has fallen to all-time lows, in my opinion. How bad is it now? Shockingly, 50% of Americans think that national news organizations "intend to mislead, misinform or persuade the public," according to a recent survey by Gallup.
I wouldn't go so far as to suggest fraud. The problem is arrogance. My belief is that human beings have narratives in our mind, a way of seeing the world, that may or may not coincide with reality and truth. We have opinions, and often our opinions masquerade as facts. We can fool ourselves. That's why free speech is so important -- so that alternative points of view can be heard, and there is intellectual debate and pushback against bad ideas or visions of reality.
The New York Times (NYT) is a traditional liberal media company, currently valued by the market as worth $6 billion. I'm a Republican, and I have reached the point where I have about zero trust in any article published in that newspaper. So that's a negative view of the New York Times, one that many people share.
Other people have similarly hostile views about Fox News (FOX). Mr. Market says that company is worth about $16 billion. The partisan biases of these news organizations are well known. They are intellectual silos. If you want a Democrat or Republican slant on the news, you know where to go.
The Twitter implosion
Last year, the world's richest man, Elon Musk, decided he wanted to buy an internet media company. So he spent $44 billion to buy Twitter.
It was kind of amazing to me how many people in the media howled about this. The Washington Post, for instance, ran many, many editorials talking about how awful this was. (The Post is owned by another billionaire, Jeff Bezos, so many of these rants seem highly hypocritical). Here is the WaPo, putting free speech in scare quotes: Elon Musk's 'free speech' agenda dismantles safety work at Twitter, insiders say.
That's not an editorial opinion, by the way. That's supposed to be journalism! So to me it's kind of bizarre for journalists to refer to censoring speech as "safety work." That's right out of 1984 and the Pravda school of journalism.
It's quite odd to have traditionally liberal media abandoning the idea of free speech. Or maybe it's not so strange. Back in 1992, Nat Hentoff -- a reporter for the Village Voice -- wrote a book, Free Speech For Me -- But Not For Thee, about the phenomenon. Wanting to silence your opponents is common across the political spectrum.
After Musk took control of Twitter, he did a document dump of company e-mails, and gave the trove to two journalists on the Substack platform, Matt Taibbi (who used to write for Rolling Stone) and Bari Weiss (who used to write for the the New York Times).
Diving into the internal e-mails, the journalists discovered that Twitter had been routinely censoring free speech at the request of government agents. As part of the agreement with Musk, the story first broke on Twitter. The explosive story detailed how Twitter had developed blacklists and would shadow ban various disliked speakers.
This is a clear and obvious violation of the First Amendment and our free speech clause. While the First Amendment does not apply to Twitter, or any private corporation, the company was censoring citizens on the government's behalf.
This was an appalling breach of our laws, done by both the Biden administration and the Trump administration. And what's shocking to me, as a citizen and a lover of free speech and liberty in general, is that our media "watchdogs" not only had taken the government's side, they were doing their best to keep the censorship regime in place.
Substack emerges as a free speech oasis
While the Twitter files were initially released on the Twitter platform, as a condition of the document dump, it was important for Musk to find reputable journalists to do the actual work of reading all the e-mails.
Did Musk reach out to the New York Times, or the Washington Post, or the rest of the legacy media? He did not. It's easy to see why -- these Democrat media outfits had been routinely attacking him for the acquisition of Twitter in the first place. None of the journalists working for these Democrat newspapers wanted to run a story that would embarrass a Democrat administration. My assumption is that Musk believed, with good reason, that many of the journalists would not have run the story at all!
It's interesting to read the Wikipedia entry for the Twitter files, as the website -- which alleges that it is non-partisan -- had internal deliberations about whether the entry should be censored and kept off the internet. Wikipedia, of course, crowd-sources its data entries. But it's rather shocking that people who say a story is a "nothing-burger" feel the urge to censor it and make it disappear. And we should applaud Wikipedia as the company is honest enough to allow its readers a peek into its internal deliberations.
Of course, Musk could have provided the Twitter files to Fox news, or the New York Post, or the few media outlets that could be described as Republican media. But that raises the same problem -- the recognized political bias of the outlet made it less-than-trustworthy. Liberal media said there was no story and it should be censored and hidden away. And conservative media would only focus on the bad things done by Democrats.
Musk elected to do his document dump with independent journalists on the Substack platform. It's important to note that Matt Taibbi and Bari Weiss are classic liberals who believe in free speech. It's kind of ridiculous to dismiss them as Republicans or non-journalists, but some people have tried to do that.
It's even more ridiculous to dismiss Substack as some pro-Trump outfit. Michael Moore writes on Substack. Robert Reich is here, too, and Kareem Abdul-Jabber and Glenn Greenwald and many other independent journalists, writers, and thinkers, across the political spectrum.
My Facebook feed was shut down in 2016, during the Clinton-Trump election
Something very odd happened to me personally in the summer of 2016. My Facebook feed froze. It wasn't moving. Nothing new appeared in it. Effectively, Facebook stopped working for me.
I assumed it was just some sort of tech glitch, so I spent a few hours trying to fix it. I was using one tech giant (Google) to try to figure out why another tech giant (Facebook) had stopped working for me. Because I couldn't find a help desk at Facebook! Apparently, having your Facebook feed freeze up on you wasn't a thing that people needed help in fixing.
What I discovered, after spending several hours trying to solve the problem, is that Facebook offered all kinds of help in reporting the bad speech of other people. Did some speaker upset you or offend you? Report them to Facebook and they might silence the offender for you.
So that was aggravating. Not only was I having trouble getting Facebook to work, now I was wondering if I had offended some of my friends and they were actively trying to have me silenced. I sort of assumed that if I annoyed somebody on Facebook, they would just "de-friend" me, and they would no longer see my posts. But now I was wondering if I had upset somebody so much, they had reported me to the Facebook authorities. And was it possible that somebody at Facebook had simply decided to freeze my account so that it did not work?
2016 was the year of the Clinton-Trump election, of course. So I wondered, in the back of my mind, was this political? I'm a pro-lifer, and that can upset people. I was having my own political stress in 2016, as I would describe that particular election as Cruella de Vil versus Darth Vader. I ended up voting for the Libertarian pothead, whose answer for every question seemed to be "more marijuana."
Anyway, as you might expect, nobody from Facebook explained why my feed was frozen. So they just left me with a frozen Facebook account in 2016. And then, a couple of weeks after the election results were in, my Facebook feed started running again.
"Wow," I said to myself, kind of cynical. "That's a company I do not trust."
Should I invest in Substack?
One of the ways I invest is to try to make the world a better place. I invest in companies that I like, or respect. That makes it easier to hold the stocks for the long-term. I'm often investing in unprofitable biotech companies that have neither earnings nor revenues. That's terrifying for a lot of investors, and they wouldn't touch biotech with a 10-foot pole. I'm used to it.
My investing style involves substantial risk-taking, what I would describe as "high risk, high reward" scenarios. If I'm wrong, I will lose 90% of my money or more. In those happy occasions where I am right, however, my gains will sometimes be fantastic. Not just 1,000% returns, but 10,000% returns, or higher. I love the risk-reward profile of this kind of investing.
I'm a big fan of venture capital. To me this is a major achievement of capitalism as a philosophy. New ventures have to be funded if they are going to happen. Capitalists risk their funds in order to make money. Because the risks are higher, the payoffs are greater if you are right.
Venture capitalists are often wrong. When you are wrong, you are going to lose money on those investments, up to and including everything you invested. One way to deal with this fear is to limit the size of your investment, either on a cash basis ("I'll just invest $1,000") or on a percentage basis ("I'll invest less than 1% of my assets here").
Substack put together a mini-roadshow for their investing public. That's well worth a read, if you're interested in investing a small amount. My family invested $2,000, but you can invest as little as $100. So far the company has almost 6,000 investors. That's a tiny, tiny number of people, of course.
We don't have access to a lot of financials. Once the company goes public, we'll see numbers. I'm assuming the company isn't profitable yet. Cumulatively, Substack has brought in about $30 million in revenues. (I got that number from the $300 million that the writers have been paid on the platform, and Substack's 10% take rate).
To me the key financial metric is the market cap ($585 million, pre-funding). The reason that excites me is that it's quite a bit cheaper than the New York Times ($6 billion) and Fox News ($16 billion). Those are well known journalist outfits that employ a lot of people and make a lot of money. Can Substack be worth as much as either of them?
As a business, I value Substack as a stronger business opportunity than, say, the New York Times. I think legacy print media is in real trouble. I would say that many newspapers are dying. The future for the NYT is its online edition, and whether it can maintain trust. I'm doubtful. The NYT has been running editorials about our possible need to blot out the sun. The editor for the editorial page had to resign after he published an Op-Ed from a sitting U.S. Senator. That's the sort of thing that happens when your newsroom becomes a one-party state, and alternative voices are brutally silenced.
What's even nicer is that Substack is a pure online outlet, without all the costs of a traditional publisher. Substack doesn't even have editors. It's pure platform. So one comp I would consider is that the company might become a long-form version of Twitter ($44 billion was the price Musk paid).
So if Substack continues to grow and enjoy more and more name recognition, it will have an IPO, and it might become one of those internet platforms that become a household word. I couldn't possibly predict with any specificity if Substack will make it to $6 billion (NYT) or $16 billion (FOX) or $44 billion (Twitter). It could fail to hit any of these and die an ugly death without even making it to the IPO stage.
The company is attracting a huge amount of talent at the moment, and the wonderful thing about these internet stocks is that the network effect gives some of these media platforms a strong advantage over competitors. Here's a great analysis about Substack's "unfair advantage."
Should I buy shares in the company? For me, a writer on the Substack platform, the question is an easy one to answer. If I'm going to invest time and energy as a writer on Substack, I want to own a piece of the business, too. Stock ownership is how real money is made, not wages. (At least in my experience!)
With my small investment, the maximum my family can lose is $2,000. That won't break us. And the potential upside is significant. If Substack reaches an NYT valuation, my shares will be worth around $20,000. If the platform is seen to be as valuable as Fox News, it's $52,000. And if one day Mr. Market thinks Substack is as valuable as Twitter is today, then we're up to $146,000. Those are significant potential rewards for a small investment. Being early to an investment idea makes it much riskier, but it also makes the payout much higher.
How do you invest in a pre-IPO?
This week, Substack opened up its Series B round of financing so that $5 million worth of shares could be made available to writers on the platform. This funding round is already over-subscribed, so there's a fair amount of excitement among writers on the platform.
The minimum you can invest is $100, and the maximum is $2,200, for ordinary investors. While these are small amounts, the significant upside if the investment pays out might make it worthwhile.
You make the investment here. Substack wants to reward writers, journalists, and artists who are on the platform. So if you wanted to buy shares, you might open up a free account at Substack to increase your chances. The company is also biased in favor of paying subscribers.
The way it works, you sign up to buy a specific dollar amount of shares in the company. The website tells you the fee. It's not free, unfortunately, and so it's rather like buying a stock back in the 1970's; you'll pay a little for the privilege. In my case, we had committed $2,000 for the purchase. The fee turned out to be $100. So now we're committed to buying $1,900 worth of Substack shares, and paying around $95 to the Wefunder website.
You're not charged anything until you actually buy your shares. You may or may not get all the shares that you want. If you want to increase your chances, you should open up a free account at Substack and pay to subscribe to a couple of writers you deem worthy. It's early days, but I think this internet platform will one day be worth substantially more than its valuation today.