Beware: Do NOT Invest in this Awesome Startup

By Matthew Milner, on Wednesday, April 19, 2023

A few weeks ago, a startup set out to raise capital from investors like you.

It quickly raised $100,000… $1 million… $5 million.

And now, with just 24 hours left to invest in it, it’s raised about $8 million.

Clearly, this opportunity has caught investors’ attention.

So why am I pounding the table saying DON’T invest in it?

For the answer, read on.

The Substack Story

The startup I’m talking about is called Substack.

Substack is a platform for writers. It helps writers email their content to readers like you — and importantly, it helps them charge for it.

Many writers are making a living from it. Specifically, about 17,000 writers are earning money, with the top 10 collectively making more than $25 million annually.

The company was founded in 2017. Here’s a snapshot of its first few years:

  • 2018 — Graduated from the Y Combinator accelerator and raised $2 million.
  • 2019 — Raised $15 million led by Andreessen Horowitz, a top VC.
  • 2020 — Hit 100,000 paid subscriptions.
  • 2021 — Hit 1 million paid subscriptions. Raised $65 million, again led by Andreessen.
  • Today, the company boasts more than 35 million monthly active subscriptions, with about 2 million readers like us paying for a subscription.
  • The company did about $10 million in revenues in 2021. In 2022, according to The Verge, it probably did about $18 million.

It’s tough to argue with its progress. And as the company says, it’s aiming to build a “new economic engine for culture.” It’s tough to argue with that, too.

Everything sounds pretty good, right? Maybe even great. This is an exciting enterprise.

So why am I telling you to NOT invest in it?

The “10x Your Money” Rule

To explain, let me back up a minute…

When Wayne and I first launched Crowdability, we conducted a deep research project.

Our goal was to identify a proven process for picking successful startup investments.

Over the course of a year or so, we sat down with more than three dozen of the most successful startup investors in the country. At the time, these investors had collectively backed more than 1,080 startups, and generated several billion dollars in profits.

And gradually, they taught us dozens of tools and “tricks” to identify winning investments.

But of all their strategies, one has been the most valuable by far:

How to identify the investments that can return 10x your money.

Go with the Odds

In case you didn’t know, startup investors earn their profits in two main ways:

  1. The startup goes public in an Initial Public Offering (IPO); or
  2. The startup gets acquired.

IPOs can lead startup investors to massive profits, but IPOs happen very infrequently.

The most common way for startup investors to earn their profits is through an acquisition — in other words, when a startup they invested in gets taken over by another company.

To put the numbers in perspective: In 2020, there were about 480 IPOs. But during the same time frame, there were about 12,000 takeovers.

So, how can we spot potential takeover targets early — so we can cash out for big gains if and when they get acquired?

“Every Battle is Won Before It’s Ever Fought”

To answer this question, let me tell you about one of the investors we met during our startup research project.

Before this gentleman became a venture capitalist, he was a high-ranking military officer.

As he peppered our conversations with references to “storming the beaches of Normandy” and “the Battle of Little Round Top,” he often mentioned a particular expression:

“Every battle is won before it’s ever fought.”

As these words relate to investing, here’s what he meant:

Certain actions you take before you make an investment can determine your ultimate success. And one of the most important of these actions is this:

Filtering out investments based on their valuation.

The Importance of Valuation

Valuation is another way of saying “market cap.” It’s the total value of a company. For public companies, we say market cap. For startups, we say valuation.

And here’s the thing:

Despite what you read in the press about big-ticket takeovers — like Facebook buying WhatsApp for $19 billion — the sales price for most startups is less than $100 million.

In fact, according to PricewaterhouseCoopers and Thomson Reuters, the majority of acquisitions take place under $50 million.

So, if your goal is to earn 10x your money on a startup that might get acquired for $50 million, how do you “win this battle”?

Simple: invest at valuations of $5 million or less.

And that brings us back to Substack…

The $585 Million Startup

As you learned above, Substack raised $65 million in 2021.

At the time, its valuation was $585 million. That’s about 100x higher than we generally recommend. But keep in mind — that was during the boom-boom days, before the Federal Reserve started raising interest rates.

Since then, valuations have tumbled. So when the company went out to raise $75 million to $100 million from venture investors on favorable terms last year — TechCrunch reports it was aiming for a $750 million to $1 billion valuation — it couldn’t.

So a few weeks ago, it decided to raise money from the writers on its platform as well as from investors like you — at the “old” valuation of $585 million.

That doesn’t seem like a fair price.

What would be fair? Well, without knowing all the company’s financials, it’s hard to say. But media companies like The New York Times or Vox Media tend to trade at about 1x to 2x revenues. So maybe — maybe? — $20 million to $40 million.

In other words, unless Substack reveals that it’s on pace to do $250 million to $500 million in revenues this year — or plans to get there in short order — I’m compelled to state something plainly to you:

Do not invest in this funding round.

Exceptions To Every Rule

Obviously, there are exceptions to every rule.

For example, if you’re inspired by Substack’s mission — which is commendable and exciting — perhaps you might choose to support it.

And if you’re a writer who’s making his or her living from Substack, that’s another reason to support it.

Furthermore, if you have an expert to guide you, you can always consider investing in startups that are more highly valued. After all, many investors considered companies like Facebook or Airbnb “wildly overvalued” when they were worth $10 million or $100 million or $1 billion. Now they’re worth hundreds of billions.

Perhaps Substack is in the same rare air.

If you’re interested in learning more about Substack and its funding round, click here »

But when you’re just getting started in early-stage investing, limiting your investments to startups that are valued at $5 million or so is a smart strategy to stick with:

This strategy will give you the greatest chances of potentially earning 10x your money.

We’re looking out for you.

Happy Investing,

Best Regards,



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Tags: Startups Substack

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