Part 1: A Creative’s Subscription Revenue: Can you lend against it?
The atomic unit of a media enterprise is the creator. It always has been. But, now armed with new mediums and technologies, more and more creators are becoming standalone businesses.
This new tech stack has also empowered creators with new ways to monetize. Salaries are being replaced by advertising, merchandise, subscription fees etc.
These new revenues necessitate a review of the creator’s capital structure. The creator’s choices will depend on the capital available; however, to date, commercial banks have not adjusted their lending to appropriately reflect the risks of this new ecosystem.
From the lender’s perspective, unlocking the creator’s capital stack will depend a lot on the platform itself. One platform that poses an interesting opportunity for unlocking the capital stack is Substack.
Substack is a platform writers can use to create, distribute and monetize their newsletters. By solving for usability, writers can better focus on their writing, and Substack handles everything else with just a few clicks. By preserving writers’ crucial headspace to focus just on their writing, Substack creates the opportunity for higher quality content, which it dispenses to readers in a way that’s easy to read and dependable. It’s a great product and a great business.
I have thought a lot about lending to creators through Substack-like platforms. Why do creators need financing? From a commercial perspective, financing could help creators fund the time required to build a subscription base large enough to replace their income (think pre-seed capital).
Financing might also improve the writer’s ability to spend on subscriber acquisition and quality content. A strong lender/borrower relationship is one in which the lender provides capital to be spent on productive activities that generates excess cash and leads to growth. Assuming the growth model is accurate, the excess cash pays off the initial loan, with more money left over as profits to the borrower. The imagined use of proceeds in this case, would be productive.
Ideally, the lending product would create: (1) A tech-enabled window into the creator’s business and (2) a repayment flow from the platform to the lender that mirrors the cash flows of the business. By building predictability into the unprecedented and de-risking the payback, a tech-enabled subscription platform may allow lenders to provide competitive financing to previously unfinanceable borrowers.
From the lender’s perspective, some businesses would be easier to finance than others. Creed-based spaces, in particular, such as religion, sports, and music may be great credits because of the predictability of their cash flows.
Projections are a function of 1) churn 2) growth in subscribers and/ or 3) the ability to upsell to existing subscribers. For these spaces, lower churn rates, the main variable in predictability, is likely to remain stable overtime.
Predictable Content = Predictable Cash Flows
While Substack prides itself on enabling “differentiated” and “de-centralized narratives,” which may seem antithetical to these spaces, creed-based spaces actually benefit for the opposite reason: they deliver a level of predictability and consistency while leaving room for creativity.
Across creators, niches will be carved out. Instead of centralizing across narratives, creators will be forced to entrench themselves in their own narratives or derivatives of others. Creators will establish traditions, one of which will be the twist, the hot take, the homily. Traditions are consistent but different, a formula for generating a “way of life” following over a long period of time.
The medium improves the formula. Or maybe it’s as Marshall McLuhan explained in Understanding Media: The Extension of Man, “The medium is the message.” Either way, it’s easy to imagine the improvement in the substack model for religion, sports and music genres when the message is delivered with integrations with Spotify, Instagram, Medium, TikTok etc.
It’s not that the traditional mediums (e.g. ESPN, Medium, Twitter, a Sunday Service etc.) are unattractive — they are. The difference is at the creator level, an integrated offering creates more value because it decreases the user’s search time, while improving their comprehension. This opens the door for new forms of digital media like Substack to deliver a more holistic experience using the social media platforms and infrastructure that already exists, pulling them together and monetizing the total package through subscription fees.
Through traditions, homilies, and seamless integrations, a creator-centric platform can create loyal subscribers and therefore, predictable cash flows that lenders can rely upon.
However, while some may own a blog that’s worth more than their house, commercial banks don’t see it that way as they have never underwritten the value of a blog before. We’ll explore the reasons why and the potential solutions in Part 2: The Traditional Underwriting Model below.
