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This Week the UK is in a crisis of leadership, and tech stocks are declining at a rapid rate. But @HamishMcKenzie is bullish about Substack and @HunterWalk agrees, but has advice. @Meta and @Microsoft are going virtual with Teams. @BenThompson is a bit persuaded and so is @MGSiegler. I am not ;-)
That Was The Week is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
Falling Valuations and Venture Capital
How Low Could Valuations Go? Tomasz Tunguz
Please stop calling it the ‘newsletter economy’ - Hamish McKenzie
Substack Needs an App Store - Hunter Walk
Meta Meets Microsoft - Ben Thompson
The Petal to the Meta - M.G. Siegler
An Interview With Meta CEO Mark Zuckerberg and Microsoft CEO Satya Nadella
Virtual Society, Blockchains, and The Metaverse - A16Z
Sequoia Capital, Binance Stand By Equity Funding for Musk’s Twitter Takeover
Musk’s Twitter Offer Still Being Questioned as Equity Partners Look to Exit the Deal
Banks stand to lose at least $500m if they fund Elon Musk’s Twitter takeover
Fintech fundraising has reverted to the mean - Alex Wilhelm
This venture capitalist has backed 40 unicorns by focusing on the things most VCs overlook - Danny Rimer
Startup of the Week - European VC
European Venture Funding Drops 44% as Early Stage Weakens - Gene Teare
Europe’s Plan to Beat Silicon Valley at Its Own Game - Niklas Zennstrom
Self-Driving Cars - Bill Gurley
I am in London this week, speaking at the Battle of Ideas Festival on Saturday and Sunday. The Internet vs the Nation State is on Saturday and so too is Are Dating Apps the End of Romance? Tickets are available on Eventbrite.
I landed Wednesday and today witnessed the new Prime Minister - Liz Truss - fire her Chancellor of the Exchequer and do a U turn on lowering corporate taxation. It was one of the fastest failures in prime ministerial history. TV is full of dire predictions that she too will go, possibly within a few weeks.
The UK is not an optimistic place right now.
And neither is most of my reading this week. Tomasz Tunguz, always prescient, writes about the continuing decline of public tech company valuations to multiples of revenue lower than at any time since 2016.
And after Meta (nay Facebook) held its annual conference and introduced a new $1499 face mask for VR experiences, commentators are universal in predicting that VR will not become the next interface for digital experiences. That, despite Microsoft deciding to integrate Teams into the metaverse.
But the thing that caught my attention was Substack’s Hamish McKenzie writing a post to declare that Substack is not a company architecting a “newsletter economy” and neither is it building a “creator economy”.
The trend that Substack is part of is not a newsletter trend, or even the much-hyped creator economy. We are part of a seismic shift in the media economy that is all about writer and creator ownership and independence. When writers are in charge, they can do the work they believe is most important, have a direct relationship with their readers, and have the potential to make far more money than they could get from being an employee who produces content for others to own and disseminate. Our fellow travelers in this trend are not email service providers or legacy news organizations, but the likes of Shopify, Twitch, Patreon, OnlyFans, and Discord. This subset of the media economy is thriving. It is entirely different to what some people think of when they talk about a “newsletter economy.”
Speaking for myself, this makes complete sense. It is not just a quibble about words. A platform for producers of content to build a relationship to those who consume their work is exactly what Substack is. The recent changes in recommendations (where one substacker can recommend others) has led to a lot of internally generated subscriber growth. With video and audio becoming first class formats alongside words the range of experience it is possible to create has expanded. The only missing element is live streaming, where third parties have to be used to engage an audience.
This is where Hunter Walk from Homebrew pops up this week to argue that Substack should open up an App Store for third party features to be integrated into the platform. Hunter makes a good case. But I would be just as happy if Substack acquired ReStream or a lookalike.
Finally, last week I speculated that Elon Musk may want the financial backers he originally pulled together to fall apart, giving him a legitimate reason for not closing the deal, or renegotiating its price. This week there is evidence that it may indeed be falling apart. Twitter is still aggressive in trying to get the deal closed. What will happen? I have no idea, except that only Twitter wants the deal closed on the original terms. It would be strange if it succeeds. As the value of everything falls, it is unlikely Twitter can be different.
The Video and Podcast with @kteare and @ajkeen accompanying That Was The Week is recorded separately and delivered to paying subscribers via email on Friday or Saturday each week. To subscribe, go to our home at Substack. This week I am traveling so no video. We will be back to normal next week.
Read That Was The Week in the Substack app
Available for iOS and Android
The public software market continues to compress. Enterprise-value-to-forward-revenue multiples are now below 2016 levels for the first time in 6 in years.
The 25th percentile of companies trade at 3.3x today compared to 4.0x in 2016. The median or 50th percentile trade at 4.9x vs 5.6x. The 75th percentile have resisted the downward pull & retain their premium: 7.3x vs 5.8x.
The Federal Reserve Bank raising rates has been a strong depressor of valuations. The rates on the 10 year bond correlate at -0.49 R^2, meaning yield changes explain about half of the forward multiple’s movement since 2019.
With the Fed seems intent on raising rates further, how low could forward multiples fall? A basic linear regression using this data produces this table
10 Year Rate Implied Forward Revenue Multiple
4.00% 5.1x
4.25% 4.4x
4.50% 3.6x
4.75% 2.8x
5.00% 2.1x
The linear model is quite sensitive to the increase in rates. It doesn’t consider any other factors & it’s R^2 is only about 0.5. But it does illustrate the impact of rates on software valuations.
Would it be crazy to see 3.3x forward? Not really. It happened in Feburary 2016.
Please stop calling it the ‘newsletter economy’
Or the creator economy, for that matter
Hamish McKenzie
When we started Substack in 2017, we told people that we made it simple to start a paid subscription publication. But that terminology was confusing for some people, who wondered if by subscription publications we meant magazines, academic journals, or such like. We solved that problem by instead telling people that we made it simple to start a paid newsletter, since that was easier to instantly understand. Then, we were able to convince writers to use Substack instead of email service providers such as TinyLetter and MailChimp.
The term “newsletter” was just a rhetorical device, though. It was only one small part of what Substack was. Substack was more like a blog where you could email the posts to your readers. You could collect money and make some posts available only to paid subscribers. There were comments, and an option to publish posts that were purely for discussions. Soon, we added audio features, so you could host, distribute, and monetize a podcast. And nowadays, you can publish subscriber-only video and complement your writing with narrations. Everyone on the platform has a Substack profile. There’s an app. The network of writers, publications, and readers on the platform drives more than 40% of all Substack subscriptions.
For most of Substack’s life, however, a good number of people, especially those who work in media, have wrongly assumed that we are part of a newsletter trend.
Paid Subscriptions Aren’t Enough. Why Substack Should Build An App Store
Hunter Walk
Beyond the aforementioned community standards questions they inspire a lot of public debate for something which is basically a CMS, email list management tool and Stripe integration. One way to understand the coverage is via Aaron Zamost’s important narrative clock metaphor. The fact Substack raised large amounts of capital during a particularly bullish time in our industry (and the people they raised it from) made them a particularly delicious topic.
“A company’s narrative moves like a clock: it starts at midnight, ticking off the hours. The tone and sentiment about how a business is doing move from positive (sunrise, midday) to negative (dusk, darkness). And often the story returns to midnight, rebirth and a new day.”
But this isn’t a post about any of that. At least not directly. Instead consider it a companion to my “Why a Paid Newsletter Won’t Be Enough Money for Most Writers.”
So long as Substack offers a great publishing platform (and helps grow audiences) they will have enough writers. Yes, Author Development will still be a staffed function and various incentives (such as the well-covered Pro guarantees) may exist, but I’m actually not worried about the ‘supply side’ of their business, at least at the top of the funnel.
What does give me pause is how many of those publications will (i) want to monetize at all [you can just use Substack as a free newsletter publishing tool if you want], (ii) how much revenue those writers will be able to make directly from a subscription fee [sidenote — one ‘risk’ of the Substack Recommendations product is it yields primarily low paid conversion rate new subscribers, which means monetizing free readers becomes more important] and (iii) a belief that Substack’s 10% take rate isn’t sufficient margin for them to grow a scaled robust business. Hence, and now we get to the title of this post, Substack Needs an App Store.
Ben Thompson
There is an easy to way to write this Article, and a hard way.
This weekend the easy way seemed within reach: I watched Meta’s Connect Keynote (I had early access in order to prepare for an interview with Meta CEO Mark Zuckerberg and Microsoft CEO Satya Nadella) and was, like apparently much of the Internet, extremely underwhelmed. Sure, the new Quest Pro looked cool, and I was very excited about the partnership with Microsoft (more on both in a moment); the presentation, though, was cringe, and seemed to lack any compelling demos of virtual reality.
What was particularly concerning was the entire first half of the keynote, which was primarily focused on consumer applications, including Horizon Worlds; Horizon Worlds was the the app The Verge reported was so buggy that Meta employees working on it barely used it, or more worryingly, was buggy because Meta employees couldn’t be bothered to dogfood it. The concerning part from the keynote was you could see why.
That was why this Article was going to be easy: writing that Meta’s metaverse wasn’t very compelling would slot right in to most people’s mental models, prompting likes and retweets instead of skeptical emails; arguing that Meta should focus on its core business would appeal to shareholders concerned about the money and attention devoted to a vision they feared was unrealistic. Stating that Zuckerberg got it wrong would provide comfortable distance from not just an interview subject but also a company that I have defended in its ongoing dispute with Apple over privacy and advertising.
Indeed, you can sense my skepticism in the most recent episode of Sharp Tech, which was recorded after seeing the video but before trying the Quest Pro. See, that was the turning point: I was really impressed, and that makes this Article much harder to write.
Meta’s Connect conference this week was fascinating. In ways both good and bad. It started out about as bad as one of these presentations can go,¹ but slowly built into something actually impressive. Snark and snide yielded to surprise. A comically stilted presentation got bludgeoned over the head with technology and more so just a relentless Mark Zuckerberg, selling his vision to the masses.
A year ago, I wrote about Facebook’s “Second Quest” — that is, Zuckerberg’s attempt to completely remake the company from the name on down. A year later, the market has melted and Meta along with it from a stock perspective, but the company clearly remains committed. There will be no pivoting back to Facebook. In fact, they’re seemingly slamming on the gas to try to outgun their new mortal enemy.
The fruit company that shall not be named.
Zuckerberg began and ended his keynote talking about the importance of open ecosystems, just as Google used to do in the heyday of the Android vs. iPhone wars. But this is different in that Apple hasn’t actually entered the fray yet. But everyone knows what’s coming. In fact, this was very likely Zuckerberg’s last chance to make the case for Meta to own what’s next in computing without a big ass elephant standing right next to him in the room: the largest company in the world. And Meta brought a friend to the fight. The second largest company in the world.
This is smart. On both sides, I think. Meta needs Microsoft more than Microsoft needs Meta, but that’s relative
Good morning,
This interview was conducted yesterday morning as Meta was broadcasting its pre-recorded Connect keynote. One of the biggest announcements in that keynote was that Meta was partnering with Microsoft (and Accenture) to bring the metaverse to the enterprise.
To that end, I had the chance to speak with Microsoft CEO Satya Nadella and Meta CEO Mark Zuckerberg about their partnership; this is the first part of the interview. Nadella had to leave after twenty minutes, and the rest of the interview was with Zuckerberg about not just the Microsoft partnership but the company’s metaverse efforts generally, plus some additional questions about AI and competing with TikTok.
For subscribers: this is the weekly Stratechery interview, just on a Wednesday instead of the usual Thursday. There will not be an additional post tomorrow.
To listen to this interview as a podcast, sign-up for a Stratechery account to add Stratechery to your podcast player.
On to the interview:
An Interview With Meta CEO Mark Zuckerberg and Microsoft CEO Satya Nadella About Partnering in the Metaverse
This interview is lightly edited for clarity; in addition, the interview started with only Nadella; Zuckerberg joined about two minutes in.
Virtual Society, Blockchains, and The Metaverse
…
In 1986, the early internet provider Quantum Link and the entertainment company Lucasfilm Games released what might be considered the first ever MMO: a social, avatar-based world called Habitat, which could be accessed via a 300-baud modem ($0.08 per minute) and a user’s Commodore 64 ($595, or roughly $1,670 in today’s terms). Habitat was a departure from text-based MUD games (which were multiplayer but lacked graphics) and free-ranging USENET forums (which of course were text-based but lacked formalized gameplay) that dominated the early net-connected market at the time.
In short, Habitat was a virtual civilization, with real-time player chat, trading, and interaction. Habitat was also arguably a forebear of what the now-contested (both definitionally and territorially) “metaverse” may one day become.
In a reflection on Habitat, published a few years after its launch, developers Chip Morningstar and F. Randall Farmer described the complexity of a world with an emergent form of politics, economy, and user-generated content. Habitat looked and felt different: a universe which grew to over 20000 regions, including player homes, shops, arenas, theaters, newspapers, houses of workshop, and a “wilderness” area where crimes like theft and murder could be committed (a practice which a Greek Orthodox priest, who led one of Habitat’s aforementioned houses of worship, preached vehemently against in his digital “Order of the Holy Walnut” church).
There were stories of in-game currency arbitrage related to a bug that allowed a few enterprising players to buy underpriced game items from an ATM, and sell them at a higher price in a shop across town — resulting in the printing of hundreds of thousands of in-game tokens overnight. There were in-game, developer-created treasure hunts and user-created business ventures. The entire reflection on Habitat has an air of novelty and lawlessness. Even the internet standards Habitat was built upon would cease to exist within a few years: OSI, whose “presentation” and “application” layers Morningstar and Farmer complained were “simply the wrong abstractions for the higher levels of a cyberspace communications protocol”, was beat out a few years later by the simpler TCP/IP internet standard upon which the net lives today.
These early tensions might be best summed up by the header of the Morningstar and Farmer reflection on the Habitat experiment: “Detailed central planning is impossible; don’t even try.” Indeed, one takeaway from Habitat that we can apply to the internet today is that top-down attempts to impose order are almost always undermined by acts of subversion, or the natural phenomenon of the free market prevailing.
The post Virtual Society, Blockchains, and The Metaverse appeared first on Andreessen Horowitz.
Sequoia Capital, Binance Stand By Equity Funding for Musk's Twitter Takeover - The Information
At least two major equity investors backing Elon Musk’s deal to buy Twitter plan to go ahead with their funding, as the billionaire moves toward closing the deal after dramatically reversing his position on it.
Sequoia Capital, which has committed $800 million to the deal, plans to keep its funding in place, according to a person familiar with the matter. Meanwhile, a spokesperson for cryptocurrency exchange Binance, which is slated to contribute $500 million to the deal, told The Information that its commitment hasn’t changed. Sequoia’s plans have not previously been reported.
THE TAKEAWAY
Sequoia Capital and Binance, two of the biggest equity backers of Elon Musk’s planned $44 billion takeover of Twitter, are committed to funding the deal.
Sequoia is listed as the third-biggest equity backer of the deal behind Saudi Prince Alwaleed bin Talal and Oracle Chair Larry Ellison, according to a May filing. Binance is the fifth biggest. Andreessen Horowitz also committed $400 million to the deal. The venture capital firm declined to comment.
Musk had lined up roughly $7 billion from equity backers to help him secure the Twitter deal. The financing for the $44 billion deal is complex—in addition to those equity commitments and his own injection of tens of billions of dollars, Musk also lined up about $13 billion in debt financing for the deal.The Information
www.theinformation.com • Share
Musk’s Twitter Offer Still Being Questioned as Equity Partners Look to Exit the Deal
We may not be done with the Elon Musk/Twitter drama just yet.
Just when you thought that the Elon Musk Twitter takeover deal was all done and dusted, yet another potential loophole has been uncovered still lurking in the mix.
According to a new report from Insider, many of Musk’s equity partners, who agreed to back Musk’s original $44 billion offer for the company, are now seeking to exit the deal, rather than paying their share of the deal price.
As per investor Andrea Walne from Manhattan Venture Partners:
“Everyone’s trying to get out of it, no one thinks the company should be valued at $44 billion.”
And she’s probably right. Given Musk’s repeated public trashing of the company, followed by his own efforts to wriggle out of the deal (which could still see Twitter take Musk to court), Musk is now looking at potentially overpaying for a company that he himself has essentially tanked the value of.
Twitter’s current market cap is $38.52 billion, but some analysts have it much lower than that, even down in the $10-$12 billion range.
As he’s sought to exit the Twitter deal, Musk has made or amplified significant claims around the platform’s bot problems, staff and board issues, security flaws and much more.
www.socialmediatoday.com • Share
Banks stand to lose at least $500m if they fund Elon Musk’s Twitter takeover
Several large US and international banks would lose $500m or more if they proceed with obligations to fund Elon Musk’s $44bn takeover of Twitter, according to a report on Saturday.
The banks, led by Morgan Stanley and six others, including Barclays and Bank of America, committed six months ago to raise $13bn in debt to finance Musk’s purchase – an agreement that does not hinge on whether they are able to sell the debt on to investors.
According to Bloomberg calculations published on Saturday, the banks’ losses would collectively amount “to $500m or more if the debt were to be sold now”.
Higher interest rates tied to efforts to bring down record inflation have led to a deterioration in the credit markets, with returns on risky junk bonds and leveraged loans surging. When the Musk-Twitter deal was financed in April, banks agreed to terms with lower yields than the market would now accept, leading to potential write-downs.
About $400m of the $500m in losses that the banks are estimated to have on the Twitter debt are in unsecured, high interest bonds, and they exclude fees the banks would typically earn on the transaction.
“I think that those banks would like to get out of it, I think the deal makes less sense for them now, and that the debt will be harder to syndicate to investors,” Howard Fischer, a Moses Singler law firm partner, told the outlet.
In a surprise turnaround last week, Musk abandoned his three-month effort to terminate the Twitter deal through a US court in Delaware, citing the large number of fake accounts on Twitter. By some estimates, 20% of Twitter users are fake.
Fintech fundraising has reverted to the mean - TechCrunch
Global startups focused on building financial technology saw their fortunes improve last year as investors doubled, and more, the amount of capital flowing into fintech companies, measured on a quarterly basis.
The comedown from those highs took longer. But, today, looking at Q3 2022 data from CB Insights, it’s clear that the fintech funding boom is behind us; even more, global fintech funding activity is now back to where it was before 2021, indicating that last year was more aberration than new normal for the startup category.
It’s a well-trod statistic that around one in every five venture capital dollars raised in 2021 went to fintech. It is also no huge surprise that after a heady year, fintech fundraising has fallen along with overall venture activity. But the portion of venture capital disbursement that fintech can lay claim to is also in decline.
Let’s chat through the numbers and then ask ourselves what a new valuation landscape, a changed venture capital market, and a frozen IPO market mean for fintech startups large and small. To work! TechCrunch
Venture is all about the entrepreneur, says Danny Rimer, a partner at Index Ventures. “The rest is noise. Total available market (TAM) size is noise. Talking about what the exit is going to be is noise. Thinking about where the company should be based is noise.”
On this week’s Most Innovative Companies podcast, Rimer shares his investment ethos, his thoughts around the evolution of the venture capital industry (is venture still venture?), why he believes it’s a privilege to invest in someone else’s idea—and how, in return for that privilege, he promises to roll up his sleeves, get to work, and do everything possible to make that company as successful as it can be.
While it might seem counterintuitive, Rimer doesn’t pay too much attention to metrics, but instead makes investments based on individuals, on ideas, on their relevance to culture and what he might be able to build with them.
He has been a true venturer in every sense of the word, consistently seeing value where others haven’t—and has more than 40 unicorns to his name to prove it. His most recent headline-grabbing success is seed investing in Dylan from Figma, which was recently acquired by Adobe for a staggering $20 billion—a new financial record for the acquisition of a private company. Fast Company
European Venture Funding Drops 44% as Early Stage Weakens - Crunchbase News
European venture funding for third-quarter 2022 continues to fall, sliding to its lowest point in nearly two years as early-stage investment shows clear signs of weakness.
Funding for the third quarter in Europe totaled $16 billion, down 44% year over year from $28 billion and down 35% quarter over quarter from $24 billion, per an analysis of Crunchbase data.
This downward trend for European venture funding in the past quarter is in line with global and North American funding trends. We find the largest quarterly decline on a global basis year over year since Crunchbase started tracking venture funding in the mid-2000s.
Funding in Europe is at its lowest since the fourth quarter of 2020, which totaled $13.4 billion.
The biggest dip quarter over quarter was at early-stage funding, while late stage fell by a greater proportion year over year.
Crunchbase News
Europe’s Plan to Beat Silicon Valley at Its Own Game
Nikolas Zennström
Skype was arguably the first breakout European tech company. Nearly two decades after its creation, cofounder Niklas Zennström reflects on the growth of the European ecosystem, posits that combining profit and purpose is critical—and explains why Europe is set to beat Silicon Valley at its own game.
Niklas Zennström is so calm when describing moments of intense upheaval that you suspect the “Zen” in his surname is there for a reason. WIRED met the founder of venture capital firm Atomico in the company’s new HQ in Fitzrovia—offices Zennström designed himself. They are the first in the UK to achieve net-zero certification; the boardroom is climate-controlled, with temperatures designed around the individual needs of the company’s workforce. With solid oak floors, Moroccan tiles, vintage furniture, and carefully placed wool rugs, it’s a space designed to soothe and inspire.
Zennström recalls a morning in 2003 when he and his wife, Catherine, left their London apartment and six people showed up on their doorstep, one on a motorcycle. They were lawyers from the music industry pursuing him for lawsuits against his peer-to-peer file-sharing startup, Kazaa. “I tried to run,” he says mildly, as if describing catching a bus, “but sadly was not in the same shape I am now, so they served me.”
He shares similar adventures with a wry smile and slight shrug of his shoulders—like when his parents sheltered US soldiers fleeing the Vietnam draft during his childhood or when he had a back door built into his office to escape unwanted visitors while at Skype, the pioneering VOIP startup he founded with Janus Friis in 2003.
That Was The Week is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
This Week the UK is in a crisis of leadership, and tech stocks are declining at a rapid rate. But @HamishMcKenzie is bullish about Substack and @HunterWalk agrees, but has advice. @Meta and @Microsoft are going virtual with Teams. @BenThompson is a bit persuaded and so is @MGSiegler. I am not ;-)
That Was The Week is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
Falling Valuations and Venture Capital
How Low Could Valuations Go? Tomasz Tunguz
Please stop calling it the ‘newsletter economy’ - Hamish McKenzie
Substack Needs an App Store - Hunter Walk
Meta Meets Microsoft - Ben Thompson
The Petal to the Meta - M.G. Siegler
An Interview With Meta CEO Mark Zuckerberg and Microsoft CEO Satya Nadella
Virtual Society, Blockchains, and The Metaverse - A16Z
Sequoia Capital, Binance Stand By Equity Funding for Musk’s Twitter Takeover
Musk’s Twitter Offer Still Being Questioned as Equity Partners Look to Exit the Deal
Banks stand to lose at least $500m if they fund Elon Musk’s Twitter takeover
Fintech fundraising has reverted to the mean - Alex Wilhelm
This venture capitalist has backed 40 unicorns by focusing on the things most VCs overlook - Danny Rimer
Startup of the Week - European VC
European Venture Funding Drops 44% as Early Stage Weakens - Gene Teare
Europe’s Plan to Beat Silicon Valley at Its Own Game - Niklas Zennstrom
Self-Driving Cars - Bill Gurley
I am in London this week, speaking at the Battle of Ideas Festival on Saturday and Sunday. The Internet vs the Nation State is on Saturday and so too is Are Dating Apps the End of Romance? Tickets are available on Eventbrite.
I landed Wednesday and today witnessed the new Prime Minister - Liz Truss - fire her Chancellor of the Exchequer and do a U turn on lowering corporate taxation. It was one of the fastest failures in prime ministerial history. TV is full of dire predictions that she too will go, possibly within a few weeks.
The UK is not an optimistic place right now.
And neither is most of my reading this week. Tomasz Tunguz, always prescient, writes about the continuing decline of public tech company valuations to multiples of revenue lower than at any time since 2016.
And after Meta (nay Facebook) held its annual conference and introduced a new $1499 face mask for VR experiences, commentators are universal in predicting that VR will not become the next interface for digital experiences. That, despite Microsoft deciding to integrate Teams into the metaverse.
But the thing that caught my attention was Substack’s Hamish McKenzie writing a post to declare that Substack is not a company architecting a “newsletter economy” and neither is it building a “creator economy”.
The trend that Substack is part of is not a newsletter trend, or even the much-hyped creator economy. We are part of a seismic shift in the media economy that is all about writer and creator ownership and independence. When writers are in charge, they can do the work they believe is most important, have a direct relationship with their readers, and have the potential to make far more money than they could get from being an employee who produces content for others to own and disseminate. Our fellow travelers in this trend are not email service providers or legacy news organizations, but the likes of Shopify, Twitch, Patreon, OnlyFans, and Discord. This subset of the media economy is thriving. It is entirely different to what some people think of when they talk about a “newsletter economy.”
Speaking for myself, this makes complete sense. It is not just a quibble about words. A platform for producers of content to build a relationship to those who consume their work is exactly what Substack is. The recent changes in recommendations (where one substacker can recommend others) has led to a lot of internally generated subscriber growth. With video and audio becoming first class formats alongside words the range of experience it is possible to create has expanded. The only missing element is live streaming, where third parties have to be used to engage an audience.
This is where Hunter Walk from Homebrew pops up this week to argue that Substack should open up an App Store for third party features to be integrated into the platform. Hunter makes a good case. But I would be just as happy if Substack acquired ReStream or a lookalike.
Finally, last week I speculated that Elon Musk may want the financial backers he originally pulled together to fall apart, giving him a legitimate reason for not closing the deal, or renegotiating its price. This week there is evidence that it may indeed be falling apart. Twitter is still aggressive in trying to get the deal closed. What will happen? I have no idea, except that only Twitter wants the deal closed on the original terms. It would be strange if it succeeds. As the value of everything falls, it is unlikely Twitter can be different.
The Video and Podcast with @kteare and @ajkeen accompanying That Was The Week is recorded separately and delivered to paying subscribers via email on Friday or Saturday each week. To subscribe, go to our home at Substack. This week I am traveling so no video. We will be back to normal next week.
Read That Was The Week in the Substack app
Available for iOS and Android
The public software market continues to compress. Enterprise-value-to-forward-revenue multiples are now below 2016 levels for the first time in 6 in years.
The 25th percentile of companies trade at 3.3x today compared to 4.0x in 2016. The median or 50th percentile trade at 4.9x vs 5.6x. The 75th percentile have resisted the downward pull & retain their premium: 7.3x vs 5.8x.
The Federal Reserve Bank raising rates has been a strong depressor of valuations. The rates on the 10 year bond correlate at -0.49 R^2, meaning yield changes explain about half of the forward multiple’s movement since 2019.
With the Fed seems intent on raising rates further, how low could forward multiples fall? A basic linear regression using this data produces this table
10 Year Rate Implied Forward Revenue Multiple
4.00% 5.1x
4.25% 4.4x
4.50% 3.6x
4.75% 2.8x
5.00% 2.1x
The linear model is quite sensitive to the increase in rates. It doesn’t consider any other factors & it’s R^2 is only about 0.5. But it does illustrate the impact of rates on software valuations.
Would it be crazy to see 3.3x forward? Not really. It happened in Feburary 2016.
Please stop calling it the ‘newsletter economy’
Or the creator economy, for that matter
Hamish McKenzie
When we started Substack in 2017, we told people that we made it simple to start a paid subscription publication. But that terminology was confusing for some people, who wondered if by subscription publications we meant magazines, academic journals, or such like. We solved that problem by instead telling people that we made it simple to start a paid newsletter, since that was easier to instantly understand. Then, we were able to convince writers to use Substack instead of email service providers such as TinyLetter and MailChimp.
The term “newsletter” was just a rhetorical device, though. It was only one small part of what Substack was. Substack was more like a blog where you could email the posts to your readers. You could collect money and make some posts available only to paid subscribers. There were comments, and an option to publish posts that were purely for discussions. Soon, we added audio features, so you could host, distribute, and monetize a podcast. And nowadays, you can publish subscriber-only video and complement your writing with narrations. Everyone on the platform has a Substack profile. There’s an app. The network of writers, publications, and readers on the platform drives more than 40% of all Substack subscriptions.
For most of Substack’s life, however, a good number of people, especially those who work in media, have wrongly assumed that we are part of a newsletter trend.
Paid Subscriptions Aren’t Enough. Why Substack Should Build An App Store
Hunter Walk
Beyond the aforementioned community standards questions they inspire a lot of public debate for something which is basically a CMS, email list management tool and Stripe integration. One way to understand the coverage is via Aaron Zamost’s important narrative clock metaphor. The fact Substack raised large amounts of capital during a particularly bullish time in our industry (and the people they raised it from) made them a particularly delicious topic.
“A company’s narrative moves like a clock: it starts at midnight, ticking off the hours. The tone and sentiment about how a business is doing move from positive (sunrise, midday) to negative (dusk, darkness). And often the story returns to midnight, rebirth and a new day.”
But this isn’t a post about any of that. At least not directly. Instead consider it a companion to my “Why a Paid Newsletter Won’t Be Enough Money for Most Writers.”
So long as Substack offers a great publishing platform (and helps grow audiences) they will have enough writers. Yes, Author Development will still be a staffed function and various incentives (such as the well-covered Pro guarantees) may exist, but I’m actually not worried about the ‘supply side’ of their business, at least at the top of the funnel.
What does give me pause is how many of those publications will (i) want to monetize at all [you can just use Substack as a free newsletter publishing tool if you want], (ii) how much revenue those writers will be able to make directly from a subscription fee [sidenote — one ‘risk’ of the Substack Recommendations product is it yields primarily low paid conversion rate new subscribers, which means monetizing free readers becomes more important] and (iii) a belief that Substack’s 10% take rate isn’t sufficient margin for them to grow a scaled robust business. Hence, and now we get to the title of this post, Substack Needs an App Store.
Ben Thompson
There is an easy to way to write this Article, and a hard way.
This weekend the easy way seemed within reach: I watched Meta’s Connect Keynote (I had early access in order to prepare for an interview with Meta CEO Mark Zuckerberg and Microsoft CEO Satya Nadella) and was, like apparently much of the Internet, extremely underwhelmed. Sure, the new Quest Pro looked cool, and I was very excited about the partnership with Microsoft (more on both in a moment); the presentation, though, was cringe, and seemed to lack any compelling demos of virtual reality.
What was particularly concerning was the entire first half of the keynote, which was primarily focused on consumer applications, including Horizon Worlds; Horizon Worlds was the the app The Verge reported was so buggy that Meta employees working on it barely used it, or more worryingly, was buggy because Meta employees couldn’t be bothered to dogfood it. The concerning part from the keynote was you could see why.
That was why this Article was going to be easy: writing that Meta’s metaverse wasn’t very compelling would slot right in to most people’s mental models, prompting likes and retweets instead of skeptical emails; arguing that Meta should focus on its core business would appeal to shareholders concerned about the money and attention devoted to a vision they feared was unrealistic. Stating that Zuckerberg got it wrong would provide comfortable distance from not just an interview subject but also a company that I have defended in its ongoing dispute with Apple over privacy and advertising.
Indeed, you can sense my skepticism in the most recent episode of Sharp Tech, which was recorded after seeing the video but before trying the Quest Pro. See, that was the turning point: I was really impressed, and that makes this Article much harder to write.
Meta’s Connect conference this week was fascinating. In ways both good and bad. It started out about as bad as one of these presentations can go,¹ but slowly built into something actually impressive. Snark and snide yielded to surprise. A comically stilted presentation got bludgeoned over the head with technology and more so just a relentless Mark Zuckerberg, selling his vision to the masses.
A year ago, I wrote about Facebook’s “Second Quest” — that is, Zuckerberg’s attempt to completely remake the company from the name on down. A year later, the market has melted and Meta along with it from a stock perspective, but the company clearly remains committed. There will be no pivoting back to Facebook. In fact, they’re seemingly slamming on the gas to try to outgun their new mortal enemy.
The fruit company that shall not be named.
Zuckerberg began and ended his keynote talking about the importance of open ecosystems, just as Google used to do in the heyday of the Android vs. iPhone wars. But this is different in that Apple hasn’t actually entered the fray yet. But everyone knows what’s coming. In fact, this was very likely Zuckerberg’s last chance to make the case for Meta to own what’s next in computing without a big ass elephant standing right next to him in the room: the largest company in the world. And Meta brought a friend to the fight. The second largest company in the world.
This is smart. On both sides, I think. Meta needs Microsoft more than Microsoft needs Meta, but that’s relative
Good morning,
This interview was conducted yesterday morning as Meta was broadcasting its pre-recorded Connect keynote. One of the biggest announcements in that keynote was that Meta was partnering with Microsoft (and Accenture) to bring the metaverse to the enterprise.
To that end, I had the chance to speak with Microsoft CEO Satya Nadella and Meta CEO Mark Zuckerberg about their partnership; this is the first part of the interview. Nadella had to leave after twenty minutes, and the rest of the interview was with Zuckerberg about not just the Microsoft partnership but the company’s metaverse efforts generally, plus some additional questions about AI and competing with TikTok.
For subscribers: this is the weekly Stratechery interview, just on a Wednesday instead of the usual Thursday. There will not be an additional post tomorrow.
To listen to this interview as a podcast, sign-up for a Stratechery account to add Stratechery to your podcast player.
On to the interview:
An Interview With Meta CEO Mark Zuckerberg and Microsoft CEO Satya Nadella About Partnering in the Metaverse
This interview is lightly edited for clarity; in addition, the interview started with only Nadella; Zuckerberg joined about two minutes in.
Virtual Society, Blockchains, and The Metaverse
…
In 1986, the early internet provider Quantum Link and the entertainment company Lucasfilm Games released what might be considered the first ever MMO: a social, avatar-based world called Habitat, which could be accessed via a 300-baud modem ($0.08 per minute) and a user’s Commodore 64 ($595, or roughly $1,670 in today’s terms). Habitat was a departure from text-based MUD games (which were multiplayer but lacked graphics) and free-ranging USENET forums (which of course were text-based but lacked formalized gameplay) that dominated the early net-connected market at the time.
In short, Habitat was a virtual civilization, with real-time player chat, trading, and interaction. Habitat was also arguably a forebear of what the now-contested (both definitionally and territorially) “metaverse” may one day become.
In a reflection on Habitat, published a few years after its launch, developers Chip Morningstar and F. Randall Farmer described the complexity of a world with an emergent form of politics, economy, and user-generated content. Habitat looked and felt different: a universe which grew to over 20000 regions, including player homes, shops, arenas, theaters, newspapers, houses of workshop, and a “wilderness” area where crimes like theft and murder could be committed (a practice which a Greek Orthodox priest, who led one of Habitat’s aforementioned houses of worship, preached vehemently against in his digital “Order of the Holy Walnut” church).
There were stories of in-game currency arbitrage related to a bug that allowed a few enterprising players to buy underpriced game items from an ATM, and sell them at a higher price in a shop across town — resulting in the printing of hundreds of thousands of in-game tokens overnight. There were in-game, developer-created treasure hunts and user-created business ventures. The entire reflection on Habitat has an air of novelty and lawlessness. Even the internet standards Habitat was built upon would cease to exist within a few years: OSI, whose “presentation” and “application” layers Morningstar and Farmer complained were “simply the wrong abstractions for the higher levels of a cyberspace communications protocol”, was beat out a few years later by the simpler TCP/IP internet standard upon which the net lives today.
These early tensions might be best summed up by the header of the Morningstar and Farmer reflection on the Habitat experiment: “Detailed central planning is impossible; don’t even try.” Indeed, one takeaway from Habitat that we can apply to the internet today is that top-down attempts to impose order are almost always undermined by acts of subversion, or the natural phenomenon of the free market prevailing.
The post Virtual Society, Blockchains, and The Metaverse appeared first on Andreessen Horowitz.
Sequoia Capital, Binance Stand By Equity Funding for Musk's Twitter Takeover - The Information
At least two major equity investors backing Elon Musk’s deal to buy Twitter plan to go ahead with their funding, as the billionaire moves toward closing the deal after dramatically reversing his position on it.
Sequoia Capital, which has committed $800 million to the deal, plans to keep its funding in place, according to a person familiar with the matter. Meanwhile, a spokesperson for cryptocurrency exchange Binance, which is slated to contribute $500 million to the deal, told The Information that its commitment hasn’t changed. Sequoia’s plans have not previously been reported.
THE TAKEAWAY
Sequoia Capital and Binance, two of the biggest equity backers of Elon Musk’s planned $44 billion takeover of Twitter, are committed to funding the deal.
Sequoia is listed as the third-biggest equity backer of the deal behind Saudi Prince Alwaleed bin Talal and Oracle Chair Larry Ellison, according to a May filing. Binance is the fifth biggest. Andreessen Horowitz also committed $400 million to the deal. The venture capital firm declined to comment.
Musk had lined up roughly $7 billion from equity backers to help him secure the Twitter deal. The financing for the $44 billion deal is complex—in addition to those equity commitments and his own injection of tens of billions of dollars, Musk also lined up about $13 billion in debt financing for the deal.The Information
www.theinformation.com • Share
Musk’s Twitter Offer Still Being Questioned as Equity Partners Look to Exit the Deal
We may not be done with the Elon Musk/Twitter drama just yet.
Just when you thought that the Elon Musk Twitter takeover deal was all done and dusted, yet another potential loophole has been uncovered still lurking in the mix.
According to a new report from Insider, many of Musk’s equity partners, who agreed to back Musk’s original $44 billion offer for the company, are now seeking to exit the deal, rather than paying their share of the deal price.
As per investor Andrea Walne from Manhattan Venture Partners:
“Everyone’s trying to get out of it, no one thinks the company should be valued at $44 billion.”
And she’s probably right. Given Musk’s repeated public trashing of the company, followed by his own efforts to wriggle out of the deal (which could still see Twitter take Musk to court), Musk is now looking at potentially overpaying for a company that he himself has essentially tanked the value of.
Twitter’s current market cap is $38.52 billion, but some analysts have it much lower than that, even down in the $10-$12 billion range.
As he’s sought to exit the Twitter deal, Musk has made or amplified significant claims around the platform’s bot problems, staff and board issues, security flaws and much more.
www.socialmediatoday.com • Share
Banks stand to lose at least $500m if they fund Elon Musk’s Twitter takeover
Several large US and international banks would lose $500m or more if they proceed with obligations to fund Elon Musk’s $44bn takeover of Twitter, according to a report on Saturday.
The banks, led by Morgan Stanley and six others, including Barclays and Bank of America, committed six months ago to raise $13bn in debt to finance Musk’s purchase – an agreement that does not hinge on whether they are able to sell the debt on to investors.
According to Bloomberg calculations published on Saturday, the banks’ losses would collectively amount “to $500m or more if the debt were to be sold now”.
Higher interest rates tied to efforts to bring down record inflation have led to a deterioration in the credit markets, with returns on risky junk bonds and leveraged loans surging. When the Musk-Twitter deal was financed in April, banks agreed to terms with lower yields than the market would now accept, leading to potential write-downs.
About $400m of the $500m in losses that the banks are estimated to have on the Twitter debt are in unsecured, high interest bonds, and they exclude fees the banks would typically earn on the transaction.
“I think that those banks would like to get out of it, I think the deal makes less sense for them now, and that the debt will be harder to syndicate to investors,” Howard Fischer, a Moses Singler law firm partner, told the outlet.
In a surprise turnaround last week, Musk abandoned his three-month effort to terminate the Twitter deal through a US court in Delaware, citing the large number of fake accounts on Twitter. By some estimates, 20% of Twitter users are fake.
Fintech fundraising has reverted to the mean - TechCrunch
Global startups focused on building financial technology saw their fortunes improve last year as investors doubled, and more, the amount of capital flowing into fintech companies, measured on a quarterly basis.
The comedown from those highs took longer. But, today, looking at Q3 2022 data from CB Insights, it’s clear that the fintech funding boom is behind us; even more, global fintech funding activity is now back to where it was before 2021, indicating that last year was more aberration than new normal for the startup category.
It’s a well-trod statistic that around one in every five venture capital dollars raised in 2021 went to fintech. It is also no huge surprise that after a heady year, fintech fundraising has fallen along with overall venture activity. But the portion of venture capital disbursement that fintech can lay claim to is also in decline.
Let’s chat through the numbers and then ask ourselves what a new valuation landscape, a changed venture capital market, and a frozen IPO market mean for fintech startups large and small. To work! TechCrunch
Venture is all about the entrepreneur, says Danny Rimer, a partner at Index Ventures. “The rest is noise. Total available market (TAM) size is noise. Talking about what the exit is going to be is noise. Thinking about where the company should be based is noise.”
On this week’s Most Innovative Companies podcast, Rimer shares his investment ethos, his thoughts around the evolution of the venture capital industry (is venture still venture?), why he believes it’s a privilege to invest in someone else’s idea—and how, in return for that privilege, he promises to roll up his sleeves, get to work, and do everything possible to make that company as successful as it can be.
While it might seem counterintuitive, Rimer doesn’t pay too much attention to metrics, but instead makes investments based on individuals, on ideas, on their relevance to culture and what he might be able to build with them.
He has been a true venturer in every sense of the word, consistently seeing value where others haven’t—and has more than 40 unicorns to his name to prove it. His most recent headline-grabbing success is seed investing in Dylan from Figma, which was recently acquired by Adobe for a staggering $20 billion—a new financial record for the acquisition of a private company. Fast Company
European Venture Funding Drops 44% as Early Stage Weakens - Crunchbase News
European venture funding for third-quarter 2022 continues to fall, sliding to its lowest point in nearly two years as early-stage investment shows clear signs of weakness.
Funding for the third quarter in Europe totaled $16 billion, down 44% year over year from $28 billion and down 35% quarter over quarter from $24 billion, per an analysis of Crunchbase data.
This downward trend for European venture funding in the past quarter is in line with global and North American funding trends. We find the largest quarterly decline on a global basis year over year since Crunchbase started tracking venture funding in the mid-2000s.
Funding in Europe is at its lowest since the fourth quarter of 2020, which totaled $13.4 billion.
The biggest dip quarter over quarter was at early-stage funding, while late stage fell by a greater proportion year over year.
Crunchbase News
Europe’s Plan to Beat Silicon Valley at Its Own Game
Nikolas Zennström
Skype was arguably the first breakout European tech company. Nearly two decades after its creation, cofounder Niklas Zennström reflects on the growth of the European ecosystem, posits that combining profit and purpose is critical—and explains why Europe is set to beat Silicon Valley at its own game.
Niklas Zennström is so calm when describing moments of intense upheaval that you suspect the “Zen” in his surname is there for a reason. WIRED met the founder of venture capital firm Atomico in the company’s new HQ in Fitzrovia—offices Zennström designed himself. They are the first in the UK to achieve net-zero certification; the boardroom is climate-controlled, with temperatures designed around the individual needs of the company’s workforce. With solid oak floors, Moroccan tiles, vintage furniture, and carefully placed wool rugs, it’s a space designed to soothe and inspire.
Zennström recalls a morning in 2003 when he and his wife, Catherine, left their London apartment and six people showed up on their doorstep, one on a motorcycle. They were lawyers from the music industry pursuing him for lawsuits against his peer-to-peer file-sharing startup, Kazaa. “I tried to run,” he says mildly, as if describing catching a bus, “but sadly was not in the same shape I am now, so they served me.”
He shares similar adventures with a wry smile and slight shrug of his shoulders—like when his parents sheltered US soldiers fleeing the Vietnam draft during his childhood or when he had a back door built into his office to escape unwanted visitors while at Skype, the pioneering VOIP startup he founded with Janus Friis in 2003.
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