Part 3: The Challenges Ahead in Financing the Creative Economy: Creator and Platform Scalability

Predictability is one thing, scalability is another. The difficulty for Substack-like platforms is building in mechanisms for virality.

In Going Critical, Kevin Simler explains an important concept called “criticality,” the point where viral networks become sustainable.

“It turns out that there’s a precise tipping point that separates subcritical networks (those fated for extinction) from supercritical networks (those that are capable of never ending growth). This tipping point is called the critical threshold, and it’s a pretty general feature of diffusion processes on regular networks.

The exact value of the critical threshold differs between networks. What’s shared is the existence of such a value.”

Without algorithms helping the creator acquire new subscribers, creators will struggle to maintain a level of subscription fees. In other words, the creator will struggle to reach their own critical threshold.

Remember, the exact value of the critical threshold differs between networks.

For some creators, criticality may be possible once 100 subscribers are reached, for others criticality may require 1,000 or even 10,000. For instance, for a writer with 1,000 loyal fans paying $10 a month, a writer can earn a $120,000 salary. Another writer may charge $1,000 a year to 120 subscribers yielding the same result.

In short, criticality is mathematical. Different writers have different levels of criticality based on the network dynamics of their subscriber base, a proposition described in Part 1. But, criticality is also personal. Maintaining a subscriber base may not be everyone’s goal and that’s perfectly ok. However, for those who want to grow their subscriber base through financing, reaching criticality is important.

Because a productive lender/borrower relationship is one that generates excess cash over a period of time, without at least the potential to both reach and maintain the critical threshold of subscribers, lenders will struggle to finance creators.

If a creator’s subscriber base “goes critical” it will look something like this….

(Refer to: Going Critical by Kevin Simler for details on the graphic above.)

…and the lender’s protection will look more like this.

But if the critical threshold of users is not reached…

(Refer to: Going Critical by Kevin Simler for details on the graphic above.)

Revenues will fade overtime and the lender’s protection is more likely to look like this…

The post Structuring for the Downside in Asset-Backed Lending provides more details on the concept of lender protection.

The point here is that virality provides a higher likelihood that the creator’s excess cash and the lender’s first loss cushion both grow over time creating a productive lender/borrower relationship.

Similarly, platforms also have critical thresholds, a reality that should be considered by creators and lenders. Even if the creator is doing well, if the platform closes shop, the lender and the creator’s cashflow may go from X to 0.

For creators, certain platforms enable virality better than others, a quality that improves the likelihood of that platform reaching its own critical threshold.

For instance, Twitter, Facebook, and TikTok are all great at enabling scale for creators because their various algorithms measuring “trends” drive traffic. Medium, in contrast, never successfully built in algorithmic mechanisms to measure traffic to posts. It’s been less successful than its peers.

This is akin to the difference in discoverability of a flagship store on Park Ave versus driving traffic to a store in the suburbs, a reality made more acute when viewed from a global perspective.

The challenge with a Substack-like platform is that it creates a 4-walled internet community with a single-entry point — the founder/ the business/ the community leader. Pulling users into the hub (Substack-like platform) through the spokes (Facebook, Twitter, Tik Tok ect.) is possible through tools like “clicktotweet.com,” but this still requires extra attention and intent. Both are hard to gain and maintain.

Also, when financing multiple creators/ borrowers on a single platform, scale proves key. Once you acquire a stream of subscription fees for multiple borrowers, the administration and monitoring costs for a single platform aren’t that much more for 100 borrowers than they are for 10,000 borrowers. Through higher origination volume, platforms with scale improve the unit economics for lenders.

Thus, technology provides the lender a window into the past. Predictable content provides comfort about the borrower’s future. And further medium integrations improves the borrower’s message. However, because a substack model relies so much on the creator pulling in and maintaining users, as opposed to the platform generating discoverability and virality on the creator’s behalf, scalability will prove challenging for lenders.