Should creators accept VC investment?

Would you give up a 5% equity stake in your content business in exchange for a healthy advance on earnings?

Image via Pxhere

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Should creators accept VC investment?

Back in early September, I published a piece titled “The gritty reality for Substack’s middle class.” It was my attempt to push back against the case studies that dominate Creator Economy media coverage, specifically those that profile super successful creators who generate six figure incomes within weeks of launching their newsletters on Substack.

One of the reasons I wrote the piece was to set realistic expectations for the amount of financial risk a creator would need to take on in order to build a sustainable business. As I put it in the essay:

Embarking on a newsletter career requires a leap of faith — a departure from full-time work so you can increase your content output, even though you’re not yet generating enough income to replace your salary. In other words: you need some sort of financial cushion.

By “financial cushion,” I mean anything from savings to a spouse’s income. It might also mean you need to cut back on spending or put off buying a house. I can’t say for certain how big your cushion needs to be, but I think it’s safe to say that you’ll want to have a minimum of one year’s salary in the bank before even considering making the plunge.

There’s this romantic notion that creators can run their content production as a side hustle, only to jump into the venture full-time once it’s replaced their day job income. But while that sort of trajectory certainly exists, it’s far from the norm. The economics of media businesses are just too harsh, and it’s difficult to build a full-time salary without some kind of sustained period of low-paying content production.

Obviously, not everyone has the kind of financial cushion to take such a leap. They have rent to pay and mouths to feed. Also, many people are simply averse to high-risk scenarios.

That’s why several startups have sprung up with the aim of mitigating that risk.

Substack Pro is one of the most prominent examples. Substack’s executives identify writers they think have a high likelihood of succeeding on the platform. They then offer the writer a lump sum advance — usually the equivalent of a year’s salary, along with other perks like health insurance and freelance editing services — and in exchange Substack gets to keep 90% of the writer’s subscription revenue for the first year. After that first year is up, its revenue share shrinks to 10%.

A new startup called Workweek is taking the Substack Pro model and adding other extra perks. As Axios reports:

The benefits are generous given that the creators are not working for a newsroom full-time. Workweek will give creators 25 days of paid time off, 100% health insurance coverage, 120 days of parental leave to use within 1 year of childbirth, a 3.5% 401(k) plan match, a $500 annual stipend for home office needs and more.

It also says it commits to helping creators launch their own companies if they choose. In addition to offering things like a $1000 per year stipend for continuing education and career coaching, Workweek says it will commit to investing in new startups from Workweek creators if they've been with Workweek for 3 years.

The article doesn’t outline how the revenue share model works — I’m supposed to talk to one of Workweek’s co-founders in a few weeks, so hopefully I’ll find out more — but it’s not difficult to see why a writer would find Workweek’s pitch compelling; they essentially get to build an entrepreneurial business without taking on most of the entrepreneurial risk.

Perhaps the most radical approach to solving the risk problem comes from Sam Lessin, a VC investor who’s married to Information-founder Jessica Lessin. His solution is to offer a large lump sum in exchange for a longterm equity stake in the creator’s business. He recently gave $1.7 million to a YouTuber named Marina Mogilko, and here’s what he gets in exchange, according to Vice:

Mogilko enters into what Lessin described as a “career-long deal,” forking over 5 percent of her creator-related earnings for the next 30 years, plus a percentage from any IP she develops, even beyond that three-decade timeline. (As Mogilko explained it, “If I wrote a book in 2030, and it's still selling in 100 years or whatever, they're still getting 5 percent of that revenue.”)

There are a few notable caveats. Slow Ventures and its fellow investors don’t start taking back a percentage unless she’s making good money—in the range of “hundreds of thousands of dollars,” Lessin told me, adding that number will adjust with inflation as well. (“We don't want to make this a burden to people who can't afford it,” Lessin said.) And the investors only get a percentage of the money she earns as a creator, which leads to some squishy definitional questions, best explained to me like this: If she decides to become a lawyer or flames out, she can take the $1.7 million with her, no questions asked. But if she gets a Netflix deal or a job with YouTube related to the creator economy, she still forks over 5 percent.

Thirty years is a pretty substantial commitment, one that should give a lot of creators pause. Nobody has the faintest clue as to what their career will look like three decades from now, and yet we’re supposed to calculate what 5% of all our future business is worth? Here’s how Mogilko made that calculation:

Lessin said creators should ask themselves if his firm’s money could help them raise their earnings by more than 5 percent over their career. To make a decision, Mogilko created a model in which different scenarios played out: one in which she stopped producing content; a second in which she continued to grow at the same pace; and a third where she became a huge success—Netflix deals, books, the whole shebang. “We gave probabilities to every scenario. And then based on that, we projected cash flow, and just came up with a number,” Mogilko said.

According to my back-of-the-envelope math, Mogilko would need to generate over $1 million a year just for Lessin to earn back his $1.7 million in 30 years. Would I take that deal? I’m pretty confident I would.

Of all the deals I’ve outlined above, Substack Pro seems to be the most creator friendly. You get a year’s salary without having to hand over any IP or equity, and at the end of that year you can choose to migrate your entire business —including your already-existing paid subscriptions — to a different platform. Substack is simply offering you a bridge into the Creator Economy without any lock-in stipulations.

Of course, it goes without saying that the vast majority of creators won’t have access to any of these deals, at least in the early stages of their careers. Which brings us back to the original question: how do you mitigate the financial risk? Without some radical shift in how our economy works — like the introduction of Universal Basic Income — I’m afraid there’s no easy answer to that question.

Speaking of financial risk…

For the past several months, I’ve turned down just about every paid consulting project that’s come my way. Why? So I could spend every available work hour on my newsletter and podcast. I knew that if I wanted to turn this newsletter into a sustainable business, I would need to maximize the value it provides for my readers. If you get any value from my case studies or podcast interviews, consider becoming a subscriber. Use the link below and get 10% off for your first year:

Quick hits

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An in-depth look at the tech publication Rest of World, which is less than a year old but has already produced some stellar coverage. [Insider]

There an anti-NFT subculture brewing on the internet (I probably would consider myself a member), and this piece does a good job of explaining why it exists. [Garbage Day]

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"A vibrant and expanding creator economy has sprung up within Roblox, creating lucrative opportunities for brands, platforms and developers." [Digiday]

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I've always been skeptical of huge subscriber discounts, but it seems to be working for The Boston Globe. It sold a six-month subscription for $1 and then switched to $30 a month, which is a pretty drastic increase. [Press Gazette]

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Simon Owens is a tech and media journalist living in Washington, DC. Follow him on Twitter, Facebook, or LinkedIn. Email him at simonowens@gmail.com. For a full bio, go here.