By Litquidity Capital  • Nov 21, 2021
But it’s Sunday, and we don’t care about markets on Sundays (unless you’re a degenerate crypto or futures trader). We also don’t send an Exec Sum newsletter on Sunday... until now!
You may recall our inaugural "LitCap Deep Dive" breaking down BlockFi's business model and the great FinTech race to build super apps that do it all. Well we're back with our second one.
To refresh y'all on what our Deep Dives will be: it's a new series where we’ll attempt to break down businesses in a fun and interesting way. We’ll dive into the history, metrics, business model, and opportunity of companies doing cool things and changing the game. Think of it like an investment memo but made public. Some may be sponsored and others might be me staffing Karl over the weekend to eat up his free time. Monday through Friday, you’ll continue to receive the best content from Wall Street to Silicon Valley. On Sundays, you’ll read about our favorite up-and-coming companies and trends we're following across the investment landscape.
We're excited about this deep dive because:
So without further ado, we're here to talk about beehiiv, a newsletter platform that just raised a $2.6M seed round led by Social Leverage.
Let’s get into it.
Beehiiv is the newsletter platform built by content creators, for content creators.
The COVID-19 pandemic forever changed the labor market. Remote work is here to stay, office landlords are punching the air, and individuals have never had more freedom to strike out on their own. Creators who curate great content have a great opportunity to build and monetize their personal brands online.
The platforms that can provide the most value to the next generation of creators will dominate this decade, and that’s why we like beehiiv. We'll get into all of the things beehiiv offers creators that will make it great.
Beehiiv was founded by three former Morning Brew employees and one technical advisor: Tyler Denk (CEO), Benjamin Hargett, Jacob Hurd, and Andrew Platkin (CTO). They worked across a variety of positions at Morning Brew, ranging from Senior Product Lead to Software Engineer, and they played integral roles in building one of the largest newsletter companies out there.
So why did they leave Morning Brew to build their own newsletter platform? Tyler says it best:
the playbook isn’t how we can build a platform like substack
the playbook is taking what I built at morning brew (scaled 3m subs / $75m exit) and democratize that so any creator has the same tools and growth potential 🚀
— Tyler Denk 🐝 (@denk_tweets)
Jun 15, 2021
Instead of continuing to build an established newsletter company, they want to build a platform that would support all creators.
Before sharing how beehiiv is changing the newsletter game, we'll explain why the game needs changing.
Most writing platforms follow either the Medium or Substack business models.
Readers can view up to five free articles per month. To read additional articles, they must pay for a $5 subscription to the site. Readers subscribe to the website itself, not individual writers. These writers’ earnings are determined by three variables.
More members spending more time on your stories drives higher earnings. If a reader spends 20% of their time on your stories, you will receive 20% of their monthly fee ($1). If a reader subscribes to Medium through one of your stories, you will receive half of their first payment ($25 for an annual subscription, $2.50 for a monthly subscription).
While Medium does provide hundreds of thousands of readers, this audience is controlled by the platform itself.
Substack’s model is straightforward. Writers can publish free or premium newsletters. Substack does not charge writers who publish free newsletters but they do take a 10% cut of all paid subscriptions.
While Substack offers a highly polished product and enables anyone to monetize their writing, that 10% cut on all paid subscriptions adds up quickly for creators.
It’s difficult for writers to build their own audiences on Medium. The platform controls the readers, and creators engage in a Hunger Game-esque competition to gain audience attention month after month. The platform isn’t working for the writers; it’s actually the inverse. The writers are cogs fueling the platform. Creators drive readers to the site, the company makes $5 a month from each subscription, and the creators compete for the leftover cash. When hundreds of thousands of writers are competing for hundreds of thousands of viewers, it is difficult to consistently produce high-paying articles.
To its credit, Substack’s platform is more creator-friendly than Medium. Writers have access to their audience's emails and readers subscribe to specific publications. You control the following that you build, creating huge upside for writers with large audiences.
However, Substack takes a 10% cut of subscription revenue. That cut keeps scaling as your following grows. If you're making $100k a year with a newsletter, Substack takes $10k. With a million dollar newsletter, the company takes $100k. While the upside is still great, Substack takes a massive rake from its top authors.
Medium and Substack both give writers venues to publish online, but creators leave a lot of money on the table.
We just discussed how platforms make money, but it’s even more important to know how the writers themselves get paid. There are tons of newsletters out there, but there are two primary ways writers can generate revenue:
Paid subscriptions are straight-forward: you create interesting content that readers enjoy, and they pay you for said content. This strategy works well for inch-wide, mile-deep publications where readers digest detailed information. You will have a smaller total market, but more dedicated readers.
Paid subscriptions are difficult to scale, because everyone wants free material. However, revenue is consistent and readers are sticky, thus making it a stable, lucrative option for successful writers.
Monetizing a newsletter with ads is the opposite. Writers build the biggest audiences possible, then sell ad space for their large audience. Typically, these advertisements consist of small shoutouts, images, and links inserted throughout the newsletter. Free content monetized through advertising is pervasive throughout online media today: podcasts, Youtube videos, and radio are just a few platforms that have used this model for years. It works for newsletters as well:
Free newsletters with ads are easier to grow, but revenue is less predictable. The creator must negotiate terms with sponsors to make money. Time spent working with sponsors is time not spent writing. And when you're putting out a daily newsletter, a creator will be spending a lot of time trying to fill out ad inventory. Normally this results in outsourcing sales to an agency / sales team or hiring someone to handle. That's a lot more work and a higher cost than securing revenue through paid subs.
Beehiiv provides a platform for both premium and ad-based newsletters at a lower cost than other companies, because it flipped the payment structure upside down.
Writers pay beehiiv to use its platform.
You read that correctly. But why would the content creators pay the platform? Because this method is actually less expensive for the writer. Here are beehiiv’s subscription tiers:
The tiers apply to different audience sizes, and more expensive levels offer more tools to creators. Paying the platform makes sense, because the cost is flat. Let’s check out how this would impact paid subscription newsletters.
Imagine that you write a newsletter for paying subscribers. I had Karl put together an illustrative table to highlight the cost differential between Substack and beehiiv as your revenue grows:
That money really begins to add up.
Beehiiv’s model benefits writers who bet on themselves. You think you can grow your newsletter? They’ll give you the tools to make it happen for a flat cost. If you’re successful, you reap the extra rewards.
Beehiiv also benefits free newsletters that rely on ad revenue.
Like I mentioned earlier, free newsletters make money through ads. Exec Sum is one such example. You’ve seen us mention our sponsors throughout the Monday - Friday editions. Publications that already have sponsors can move over to beehiiv at no additional cost. Exec Sum has ~100k subscribers. We moved over to beehiiv from our prior ESP from hell without missing a beat (shoutout Tyler and Jake).
However, building sponsor relationships is difficult and time consuming. If you're a writer who wants to focus on delivering a high quality free newsletter, you may not have the bandwidth or existing relationships with sponsors to deal with the sales process daily. What about up-and-coming writers who are just beginning to pursue ad monetization? beehiiv is developing a solution for these creators who don’t want to worry about sourcing their own ads, and it’s launching in Spring 2022. Stay tuned 👀
For years, subscription revenue and sponsored product advertisements have driven 99% of newsletter revenue. However, newsletters are no longer just newsletters. Writers are no longer just writers. Great creators build large followings. Large audiences offer a variety of opportunities that stem beyond paid subscriptions and product ads.
Beehiiv is more than a newsletter platform. It’s a brand platform providing a Swiss army knife of tools for its writers. In January 2022, the company is releasing another monetization channel that will change the game for writers. Unfortunately, I can’t disclose details right now but I'll come back to update this once it's live.
Fortunately, you will see it first hand in about two months.
Two years ago, CEO Tyler Denk wrote about how the referral program he built for Morning Brew helped the company explode from 100k to 1.5M subscribers in just 18 months. The TL;DR: referrals incentivize readers to actively recruit new readers.
The first step is creating content that people actually want to read. If you consistently produce quality content, you will build a sizable audience over time. Once you hit a critical following size, you can kick growth into overdrive with a solid referral program.
You, the creator, determine milestones and incentives for your program. Maybe 10 referrals lands someone a shoutout in the newsletter. 25 is free merch. 50 and they pick the article topic for next Monday. You get the idea.
However you want to structure your referrals, beehiiv will provide the infrastructure for both implementing and tracking referrals. Turning your audience into your marketers is a low-cost way to scale your subscriber base quickly, especially with the current influencer pricing and Facebook / Google ad rates in this elevated inflationary environment!
Here are beehiiv’s offerings:
No other platform is offering this range of optionality at this price. By offering everything that a creator could need from one location, beehiiv is well-positioned to attract and retain top newsletter writers.
Writers on beehiiv are the creator economy. Small businesses on Shopify are the creator economy. Landlords on Airbnb are the creator economy. Free-lance drone photographers, TikTok stars with millions of followers, dog sitters advertising on Facebook, and anyone else making money doing their own thing outside of the traditional corporate structure is part of the “creator economy”.
Transfer of information used to be linear: point A to B, rinse, repeat. With the internet, information can spread from millions of distribution points.
COVID-19 accelerated this change. Every white collar job in America went remote. Suddenly, employees and employers realized they didn’t have to be in the office to get their work done. Employees had opportunities to explore other interests during work hours (myself included). While this may have been frowned upon in the office, no one really knows what you’re doing from the comfort of your own home.
Some workers realized these other interests could be lucrative. The infrastructure for the creator economy has existed for years, but a pandemic-induced lockdown kicked it into overdrive.
For the first time since the Industrial Revolution, individuals are striving to build their own brands and make a living on their own terms. The most obvious place where we're seeing this?
You no longer have to work for Bloomberg, The New Yorker, or any other massive publication to make a living writing. In fact, with a payroll of one (you) and no overhead costs, you capture the vast majority of the upside of your own writing. Thanks to the internet, marketing can be free if you know how to play the Great Online Game(shoutout to Packy). Anyone can be a writer on their own terms and a lot of writers are doing just that.
Writers want to build their own newsletters for two reasons:
When you write for the New York Times, you aren’t writing for yourself. You are writing for the New York Times. If the company doesn’t like your content, it’s not getting a green light. Media publications have largely become attention seekers with political leanings. Not an ideal environment for a writer. Personalized newsletters represent true freedom of the press.
Additionally, writing for a company means that your checks are signed by that company. Salaries have ceilings, and pay-per-view business models imply revenue splits with your employer. If you curate great content, why wouldn’t you want to work for yourself?
The internet has made this shift from media audience to writer audience possible. When 66% of readers now follow journalists as individuals instead of their publications, are the publications still necessary? No.
Writers from The New York Times, New York Magazine, Vox, Yahoo, among other publications, are transitioning to their own platforms in droves. Creator economy startups provide the path to six figure incomes if a writer has a relatively small (but loyal) following.
If software is eating the world, then individual content is eating traditional media. Writers want to build their own brands, and they are going to flock to the platforms that provide the most support for the best price.
That’s why Exec Sum is now a beehiiv publication.
More money, more optionality, and better user experience.
Exec Sum is a newsletter with ~100k subscribers (thanks to y'all 🤝). Exec Sum also generates most of its revenue through advertisements. That’s no secret: you guys have seen them at the beginning of every daily email.
Beehiiv is the platform that allows us to keep the highest percentage of our income, while providing a comprehensive suite of tools to help us produce great content. The platform also allows great optionality. For example, we can add multiple writers to the same publication and also publish different types of content from one central location. Exec Sum hits your inbox every morning before the market opens, but we can seamlessly integrate new publications under our brand.
It's really, really easy to use. And I'm not a tech guy. Check out the dashboard view.**
**Dashboard altered to hide specific subscription & engagement metrics
The writing interface is also intuitive.
Beehiiv offers us the best platform to produce quality content at a reasonable cost, so the switch was a no brainer. Tyler is the real deal, and we support his vision of building the best company to support content creators.
Sticking to their engineering roots, the beehiiv team is tuned into user feedback, shipping new product updates almost daily. Since making the switch to beehiiv, we have seen the progress in real time.
It also helps that the CEO posts company updates directly on twitter:
Now here's the fun part. So why did Litquidity Capital invest in beehiiv? Is Karl just yolo'ing bucks and seeing what sticks? Not exactly.
The investment decision was made around these key points: strong team, our interest in supporting creator-driven startups, platform stickiness, and the fact that we use it ourselves.
If you've ever read a sell side CIM, you know there's always a "seasoned management team" slide with some random boomers who've worked at so & so firm for over 50 years. These guys are actually legit. Tyler, Benjamin, and Jacob all came from Morning Brew. They developed the products and software that turned a start-up newsletter into one of the fastest growing media companies in the US.
Scaling a startup is hard. They weren’t engineers hired at Google after it was an established behemoth, they took the risk to build the tech powering Morning Brew's media business (which sold to Business Insider at a $75M valuation last year).
Scaling a small newsletter into a big newsletter is also tough. These guys did it on a company level. They know what works and what doesn’t. They know the struggles that writers face because they had to overcome those same issues. Instead of continuing to build one brand, they wanted to create a platform best suited to help all writers.
This was already covered above, but we believe individual content is the future of media. We also believe beehiiv is going to provide the best value to those creators. It helps that we are one of the creators in question.
Substack has been the talk of the town the past year, every VC / tech bro / journalist seemingly has their own newsletter. They have proved that there is demand for the product and that there is a lot of value in catering to creators. That's why they've raised over $80M to-date and were most recently valued at ~$650M in a Series B led by a16z.
Beehiiv is well-positioned to capitalize on this trend by partnering closely with creators and building their platform by targeting their pain points. Give your users exactly what they want at a fair price and that's a recipe for success.
There are a million reasons to use a product, but there is one reason to invest in a company: you think its value will increase. What makes companies more valuable? You think the company will make more money in the future. How will beehiiv make more money? Retain and grow its writer base.
Why is beehiiv better positioned for longevity?
Its business model is aligned with the interests of creators. Writers are leaving Medium because they aren’t making enough money. When the platform controls the audience, and every writer is competing for the same eyeballs, the creators have every reason to be frustrated.
Meanwhile, Substack is susceptible to churn from its top publications. Say a writer builds a newsletter with 10k subscribers paying $100 a year. That’s a million-dollar business, and the creator is paying $100k to Substack every year. This writer could buy their own domain and write on mailchimp, or switch to another platform like Revue or beehiiv, and relocate their entire audience overnight. $100k of revenue for Substack disappears.
In contrast, beehiiv provides similar (and soon, even more) value at a fraction of the cost. Writers on beehiiv will essentially have a fixed cost base as they scale from 0k to 100k+ to 1M subscribers. Beehiiv’s suite of tools creates a hub that writers will be hesitant to leave.
Good platforms become great platforms when they align their incentives with their users’. beehiiv is doing that from day one.
Anyone who enjoys their Apple iPhone, Tesla Model S, or Lululemon leggings could have made a ridiculous return by investing in the companies behind their favorite products. We recently moved Exec Sum to beehiiv because we love the product, and we think you will too.
Obviously a due dilly sesh is not complete without thinking of the downsides. While we love beehiiv, it's an early-stage startup that faces risks just like any other company.
Now we're not gonna go full 10-K risk disclosure mode so we'll focus on the two key risks we see:
1. Pressure from incumbents: One of beehiiv's biggest risks is competitors like Substack copying its business model. Beehiiv offers lower costs to writers, thus making it the financially advantageous choice for them. Substack switching from a 10% cut of revenue to a SaaS fee model could pressure beehiiv, especially considering the amount of existing writers that are on its platform. Substack, Mailchimp, Revue, etc. are all well-capitalized and have the fire power to do so, but it'd be a big business decision for any of them to change their business models / build out new offerings. Beehiiv's success will come from having great writers and providing even more features / value to them than competitors.
2. Writer churn: The existential threat for all newsletter platforms. Creators can change platforms as they wish, making retention incredibly important. Again, with all of the features that beehiiv has in the product roadmap and its low cost relative to other players, they're in a strong position to retain writers that come onto the platform. When creators implement several of beehiiv's offerings into their publications (especially those that are still under wraps), the switching costs of changing platforms just won't make sense. The company that provides the most value at the lowest cost will win, and that's what we see in beehiiv.
There's obviously other risks like ability to execute, the world blows up, cyber hacks, etc. that we won't get into here but rest assured Karl take excellent notes when I was on diligence calls with management team.
And that's a wrap, folks. Hope you enjoyed this rundown. Let me know what other companies or industries you think would be cool to drill into. If you're a founder building a sick business, hit me up as well.
Time to pound some beers and watch football.
(P.S. If there's anyone who can design an absolutely fire website for a reasonable price, hit me up. Going for that classic VC portfolio tab to the site 🙏)
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