Latest / Startup Stories with Fexingo: Conversations About Founders, Funding, and Building Companies from Zero / How Substack Turned Email Newsletters Into a Media Revolution
Transcript
- Lucas: There's this moment in 2017 where three people—Chris Best, Hamish McKenzie, and Jairaj Sethi—are sitting in a San Francisco coffee shop, and they're basically asking each other a question that sounds naive at first: why don't writers just own their relationship with their readers? Luna: It's naive until you realize that the entire media industry had been built on the opposite assumption—that the publisher owns the reader. Lucas: Exactly. And that question became Substack. Fast forward to today, June 2026, and Substack is processing hundreds of millions of dollars a year in subscription payments. But the wild part isn't the revenue—it's that they proved a new model actually works. Lucas: If these conversations have moved your work forward in some small way, there's a simple way to help keep them going. A handful of listeners chip in monthly at buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these shows ad-free. Luna: Yeah, it's a small group that makes it possible for us to take the time to dig into stories like this. It genuinely matters. Lucas: Alright—so let's dig into how Substack actually pulled this off, because it wasn't just a product bet, it was a bet on a specific economic structure. Luna: Walk me through the early days. How did they get from that coffee shop to having real writers onboard? Lucas: So the first big insight was that the existing media model was broken for the actual creators. If you're a journalist at a major newspaper, you might write a piece that generates tens of thousands of dollars in subscription revenue, but you see none of that upside. Your paycheck is fixed. Substack's pitch was: keep 90 percent of your subscription revenue, we take 10 percent. Luna: That 90-10 split was—and still is—dramatically better than what any traditional publisher offers. It's the core of their value proposition. Lucas: Right. But a good split doesn't matter if you can't get readers to pay. So they had to solve the discovery problem. How do you get subscribers to find a writer they've never heard of? Their answer was aggregating subscriptions through the platform. When you subscribe to one writer, Substack can recommend others, and over time, they built a network effect. Luna: And that's the part that traditional email newsletters never had. You could have a newsletter on Mailchimp, but there was no discovery engine. Lucas: Exactly. And the discovery engine really clicked when they started getting breakout successes. The canonical example is Heather Cox Richardson. She started 'Letters from an American' in 2019. It was a daily historical analysis of American politics. By 2021, she had over a million subscribers, and her paid conversion rate was reportedly around 10 to 15 percent. That's a seven-figure annual income for one writer. Luna: And that success wasn't an anomaly. Other writers like Matt Taibbi, Bari Weiss, and Glenn Greenwald all moved their operations to Substack, bringing loyal audiences with them. Lucas: That created a magnet. If you're an ambitious journalist, you look at someone like Heather Cox Richardson making a living directly from readers, and you think, why would I stay at a legacy publication? The platform solved both sides of the marketplace: writers bring readers, readers attract writers. Luna: But it's not just about individual writers. Substack also rolled out features like podcasts and video, expanding the definition of what a 'publication' can be on their platform. Lucas: That's a key move. Because if Substack were just a text newsletter platform, it would be limited. By adding audio and video, they turned each writer into a multimedia creator, all within the same subscription model. And they didn't charge extra for those formats—still the 10 percent. Luna: Let's talk about the money side. How did they fund this growth? Lucas: In 2018, they raised a $15.3 million Series A led by Andreessen Horowitz—that's a16z. Then in 2021, they raised a Series B of $65 million at a valuation reportedly around $650 million. The investors were betting that the creator economy in media would be huge, and Substack would own the infrastructure layer. Luna: That valuation is interesting because it's a bet on future cash flows from the platform's cut. If Substack processes $100 million in payments in a year, their revenue at 10 percent is $10 million. To justify a $650 million valuation, they need to grow that substantially. Lucas: Right. And the growth trajectory has been strong. According to public statements, by early 2025, Substack was processing over $100 million in annualized payments to writers. That implies their own revenue was around $10 million, but with a high-margin business because the platform costs are mostly fixed. Luna: But there's a tension here. Substack positions itself as pro-writer, but they've also faced criticism over moderation. When controversial writers like Alex Berkowitz or platforms like the 'Substack' of certain extremist views emerged, the company had to decide how much editorial control to exert. Lucas: That's a real challenge. Substack's initial stance was that they are a platform, not a publisher—they don't edit content. But when public pressure mounted, they had to draw some lines. They eventually banned a few accounts for violating their content policies, but it's been a delicate balancing act. Luna: And that's the same dilemma Facebook and Twitter face, but at a smaller scale. The difference is Substack's model relies on individual creators, so banning someone is a direct hit to their business. Lucas: Yeah, and it's also a philosophical question. If you believe in writer independence, you have to tolerate some voices you don't agree with. Substack's co-founders have said they want to be a 'home for independent writing,' not a gatekeeper. Luna: Let's go back to the economics for a second. Substack's 10 percent fee—is that sustainable long-term? Other platforms like Patreon take 5 to 12 percent, but Substack also provides the payment processing, hosting, and discovery. Lucas: It's competitive. Stripe, which handles the underlying payments, takes about 2.9 percent plus thirty cents per transaction. So Substack's net cut is around 7 percent. That's healthy, but they need scale. The network effects are crucial: as more writers join, the platform becomes more valuable to readers, which attracts more writers. Luna: One thing I find fascinating is how Substack has affected legacy media. The New York Times and The Washington Post both doubled down on their own newsletter products. Even The Atlantic launched a dedicated newsletter program. Lucas: Substack forced every media company to ask: if our best writers can leave and make more money independently, what are we offering? That's why we've seen a wave of 'creator funds' and better revenue-sharing deals from traditional publishers. Substack didn't just create a new business—it changed the entire industry's incentive structure. Luna: But not every writer can replicate Heather Cox Richardson's success. There's a survivorship bias. For every big earner, there are hundreds of Substack newsletters with maybe a few hundred subscribers. Lucas: Absolutely. Substack's own data suggests that the top 10 percent of writers earn the vast majority of revenue. It's a power-law distribution, like most creative industries. The platform is a tool, not a guarantee. Writers still need to produce compelling content and build an audience. Luna: Which brings us back to the original insight: owning the relationship. A writer with ten thousand email subscribers has a direct line to an audience that no algorithm can take away. That's the real product Substack sells. Lucas: And that's why, even with the challenges, I think Substack's model is durable. It aligns incentives better than the ad-supported model. The writer wants to please subscribers, not advertisers. The platform wants to help writers grow, not extract maximum engagement. Luna: But there's a looming question: can Substack continue to grow without compromising its values? The bigger they get, the more pressure they'll face from regulators, advertisers, and public opinion. Lucas: That's the tension of any platform business. But I think the bet is that enough readers value independent, subscription-based journalism that the market will sustain a certain scale. Whether that's $100 million in payments or a billion, we'll see. Luna: So what's next? Do they expand into other verticals? Maybe education or professional services? Lucas: They've already started with Substack Pro, where they advance money to writers to start a publication. That's a bet on talent incubation. And they've hinted at adding membership tiers for communities. I think the long-term vision is to become the operating system for independent creators—not just writers. Luna: It's a big ambition. But if they succeed, they'll have fundamentally changed how we think about media—from a centralized, ad-driven model to a decentralized, subscription-driven one. Lucas: And that's a story that started with three people in a coffee shop asking a simple question. It's a reminder that sometimes the most powerful business ideas are the ones that seem obvious in hindsight.