You can sail a boat wherever there's water, but it's nice to have the wind at your back. If you're kayaking on a river, it's much easier to head downstream.
We take actions in order to move toward our goals. Incentives determine whether we're met with assistance or resistance.
Sometimes incentives are obvious: startups grant equity to employees over time, in order to keep them at the company longer. As an employee, you're incentivized to work longer at the startup.
Some incentives are insidious: referees, despite trying to be unbiased, give slightly more calls to home teams. They are paid to treat teams equally, yet there's a small incentive to keep the crowd happy. (Happy fans are non-threatening fans.)
Systems with multiple parties always have incentives baked in. Everybody has goals, but it's nice when those goals can all be achieved together.
Aligning Incentives
Given the powerful nature of incentives, it's worth trying to align them between all members and stakeholders.
A relevant maxim: "If you want to go fast, go alone. If you want to go far, go together."
Companies are popping up with business models that simplify to, "we make money when we actually satisfy our customers”.
One example: Stitch Fix, the "clothing in a box" company. As I wrote a few weeks ago, Stitch Fix only makes money when customers purchase items from their shipments, which incentivizes the company to send clothing that people actually want to buy.
Media and Publishing
By now, most of us are familiar with the idea that digital media is driven by shallow metrics like page views. We can access most websites for free, because publishers make their revenue from advertisers. Advertisers pay by the eyeball, which incentivizes publishers to write salacious headlines. The internet has become a digital landfill, as clickbait is the (digital) pollution of our age.
Then came the subscription models, which are en vogue these days. In media, a subscription model with consumers cuts out the middleman (advertisers), and forces companies to provide value worth paying for (i.e. more than cheap headlines). Netflix is the popular success story here: people pay for Netflix in part because there are no advertisements, and Netflix doesn't need to serve advertisements because people are paying them directly.
While video entertainment has quickly followed Netflix's lead, the written content landscape has been slower to evolve. Major publishers like the Washington Post have transitioned to membership models, but most outlets aren't powerful enough to command direct payments from readers, who usually scoff at paywalls.
Substack
I love this company. Not only is it the platform I use to deliver this email each week, but it's attempting to fundamentally reshape the writer-reader relationship online. This past week, Substack announced its first major round of funding –more on that later. Andrew Chen, who now sits on Substack's board of directors, explained his excitement:
"Substack can solve the structural issues between publishers/writers and readers in a way that aligns the incentives between all of them."
How would this happen? Just as Netflix cut out the advertisers, Substack is cutting out the social platforms, and thus, the advertisers.
As put by one of the cofounders:
Here's the plan, explained in Substack's fundraising announcement:
Substack is based on the simple idea that a reader can make an intentional choice to subscribe to a writer they trust to provide value. We give writers the tools to publish to email and the web and build an audience that they own. It’s free, and writers can add paid subscriptions whenever they want (or not). The only way we succeed is if writers using Substack succeed – we take a cut of their subscription revenue – and writers only succeed if their readers are happy. Everyone’s incentives are aligned. If a writer chooses to leave Substack, they can take their mailing list and content with them.
The founders have often described Substack to writers as "doing everything but the hard part: writing." Writers certainly could take their content (and email list) somewhere else and not forfeit 10% of their revenue. But Substack's goal is to "provide enough value that it's more attractive than leaving." As CEO Chris Best told Ben Thompson (of Stratechery):
If they stick with it and start to make money, it just becomes obvious that it's good. Look at what would I have to do if I wanted to leave this thing, which I can do at any time, and they say "I'm actually getting more value from this than it's costing me."
The business model facilitates a healthy relationship between publisher and writer. The two parties rely on each other for revenue, but aren't locked in a contract. Their incentives are aligned.
Why Venture Capital?
Substack announcing fundraising from a venture capital firm was a bittersweet moment for the platform's creators. On one hand, it will help the company do more for writers: explore more ways to make them money, build out more features and products, and hire more staff to accelerate that timeline (Substack currently has three employees!)
Venture capital can be a dangerous path for some companies, though. VCs are driven by growth, and that sometimes means scaling companies in a way that isn't in the best interest of users (or, in this case, readers and writers).
The top comment on the announcement post sums up the feelings well (bolding mine):
Well this is great for you and reassuring validation for Substack. But I'm starting to develop an allergic reaction to VC-backed media companies. I'm willing to be proven wrong on my fear that the desire for growth will blind you to maintaining the alignment of incentives. But that is the fear. Can you write about your thinking about making this a sustainable as well as profitable business? Can you keep showing us that you have the alignment of the readers and writers front and center, and not your next round of funding or potential exits?
To their credit, the guys at Substack seem to genuinely understand the concern. While I don't exactly understand how the money will be used (beyond hiring more people to do more things), I trust the leadership team. It takes great intentionality to build something that aligns the incentives of multiple parties, and I trust that the future is even brighter for this company.
Links!
Substack's fundraising announcement letter
Andrew Chen (of Andreessen Horowitz) on why they invested in Substack
Interview with Stratechery: (email me)
Bonus
The day after the fundraising announcement, a partner at Andreessen Horowitz tweeted this out:
Hopefully they had this transparent discussion with Substack :)
Conclusions
As an individual, it's helpful to develop a mindset of skepticism. It's increasingly important not only to question the veracity of information, but to question the incentives of parties involved. In short, ask why.
When you see an inflammatory article shared on Facebook, you can ask:
Is this based on facts?
But also:
Why am I seeing this article?
Why was this article written?
Maybe, as we explored earlier, media companies are writing salacious pieces to attract clicks and views, in order to drive advertising revenue. Maybe Facebook prioritizes showing us content that keeps us coming back to their platform over and over, and maybe that means we tend to see things that outrage and polarize us.
When you start asking why, you can move past visceral reactions and on to systemic thinking. You can understand the behaviors of people who you disagree with, and start to think about how to realign incentives. Thinking about incentives on a systemic level can be applied to Congress, or help reshape how public companies are run.
Life goes on whichever way the wind blows. But if you can put it at your back, why wouldn't you?