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tl;dr: The Flywheel was the inspiration for my current full-time venture, Swapstack. Swapstack is a creator monetization platform, currently focused on enabling all newsletter creators to monetize their work through paid sponsorships.

Jake Schonberger (from The Premoney List) and I have been building Swapstack for ~8 months, and have seen enough validation via our current product to triple-down and raise a small pre-seed round to support our large vision for the platform.

If you want the condensed version of the vision and the fundraise details, check out Jake’s Premoney from today.

Read the Premoney Investment Brief

In my previous post I mentioned my intention to bring you, my dear readers, stories of exciting new companies that I encounter, along with opportunities to invest in their success.

In today’s post I follow through on that promise.

It seems fitting that the first startup I bring to you is my own, Swapstack, a project that I credit in large part to my work on The Flywheel.

Just about one year ago, when this newsletter reached the 1,000 subscriber mark in its first 2 months, I started wondering how I might be able to monetize The Flywheel. That small thought was the first step in a whirlwind journey that included starting, selling, spinning out, and ultimately fundraising for a company, all in under 12 months.

This is that story.

Before we dive in, a disclaimer: yes, Swapstack is raising a pre-seed round, and yes, I’m inviting my readers to participate. However, please keep in mind that this is not investment advice. I will make the case for why I’m dedicating a meaningful portion of my energy for multiple years to this project, but each of you should do your own diligence and make your own decision accordingly. Similarly, investing in startups is highly risky, and if you choose to participate, the overwhelmingly likely outcome is that you will lose all your money. In the United States, you must be an accredited investor to invest in startups (though if you’d like to gamble your savings away at the casino or on lotto tickets, go right ahead!) for this reason. Onto the article!

Origin Story

I never intended to start an AdTech startup.

When I started The Flywheel, it was truly a ‘throw spaghetti on the wall and see what sticks’ kind of moment. I had just resigned from Amazon for the second time in ~8 months, and wasn’t sure exactly what I wanted to do next. All I knew for certain was that I wanted to never need to go back for a third time.

The Flywheel was one project among what I assumed would be many attempts to find something that might stick. At the same time I enrolled in the On Deck Founder fellowship, where I expected to meet people who might want to work on other projects with me.

Little did I know what the serendipity of the internet had in store. Within 2 months, The Flywheel started taking off. I was now a ‘Newsletter Writer’ with a fast growing audience, with messages from all sorts of interesting people in my Twitter inbox for the first time ever.

Suddenly, The Flywheel was no longer just an attempt, it was a Project with a capital P, one with potential to turn into a real business. Thinking about it like a real business changed everything for me.

I started contemplating monetization opportunities around the 1,000 subscriber mark. Yes, my audience was still small, but it was growing quickly, attracting hundreds of smart, interesting people every week or two.

This was during the height of the Substack boom, so the obvious first idea was to sell subscriptions to my writing. It felt like something I could pull off, but after attending a talk by Lenny Rachistky during the On Deck Writer’s Fellowship (like I said, I was a writer now), I decided against it.

Lenny explained that turning on the paywall effectively converts your newsletter into a job, and for me The Flywheel was much too new to make that level of commitment. I had spent years trying to break away from jobs I didn’t want so I could create something new for myself; the last thing I wanted was to create a job I didn’t love.

With subscriptions off the table for the time being, advertising was the other real candidate. I wrote about Not Boring much later; at the time, though, Packy was just getting his own ad-supported newsletter model off the ground and teaching the rest of us how he was doing it.

The benefit of ads is that it imposes much less pressure than subscriptions: you charge for your ads, and only make money when you publish. This tends to align your incentives with your own mental health quite nicely: publish more, make more. Crucially, your readers aren’t paying you, so it’s easier to grow your audience (thus allowing you to increase your rates), and if you don’t publish for two months or so—cough not that this would ever happen..cough—nobody can really complain.

The downside of ads, of course, is that it’s not easy (there’s no free lunch!). The incomplete list of things you need to do to effectively sell ads in a newsletter includes: identify, contact, communicate with, and transact with brands; maintain an inventory calendar, listings page of ad options, and inbound requests from prospective brands; write, review, edit, and receive approvals for ad copy and creative assets; collect and report results back to the brand.

Around this time, Packy open-sourced the impressive slide deck he was using to sell ads in Not Boring; this thing was intense, thorough, and impressive. It occurred to me that it might be useful to be an ex-investment banker after all.

All things considered, sponsorship seemed a much better fit for me than subscriptions, so I applied to some advertising marketplaces I found online as a starting point. After all, email marketing is not a new industry, even if the Substack-led boom in newsletters was something of a resurgence for the medium.

Pretty soon, I got rejected or ghosted by them all. When I received an explanation, I was told to come back when my audience was 100,000+.

This seemed clearly wrong—Packy was proving that an audience of 5 or 10,000 is valuable, selling ads for $3,000 a piece even at that size. At 1,000 subscribers and growing fast, The Flywheel had line of sight to those sorts of numbers. If these more established marketplaces were not willing to serve an audience like mine or Packy’s, I figured, someone ought to.

This ignited a spark of an idea for a business that would help newsletter writers like myself sell sponsorships. Pretty soon, I met a fella in On Deck Founders (ODF) who shared my name and my burgeoning interest in newsletters.

Swapping (Sub)Stacks

Jake Schonberger was working on a number of projects when I met him in ODF, the most relevant of which he was calling Swapstack. He had recently started a newsletter of his own called The Premoney List—featuring early-stage startups that were raising their first rounds of funding—and was interested in growing his audience.

He recruited a group of other newsletter writers, including myself, to run a bunch of Swaps: in other words, reciprocal promotions of one another’s newsletters.

I ran one of the first Swaps in this piece with Aja Singer of For the Love (I guess I like working with people who share either my first or last name), and Jake and I got to talking more about opportunities in the newsletter space. Eventually, I convinced him that there was probably more of a business in the sponsorships angle than the swapping angle. After a long period of cofounder dating, we decided to go for it—we officially teamed up to start building a company.

Swapstack MVP

After deciding to focus on newsletter monetization, we started designing a MVP to validate whether there were meaningful problems in this space that we could solve for both creators and brands. The initial hypotheses for these were:

Newsletter writers don’t have the time or ability to secure consistent sponsorships from high quality brands.
Brands are missing an opportunity for a high quality, high-ROI marketing channel because they either don’t know about it or it is too difficult to execute.

Through our collective work on The Flywheel, Premoney, Swapstack, and our combined three On Deck fellowships, we were as well positioned as anyone to test these hypotheses with both writers and brands. Jake’s ad sales experience at Facebook was a huge bonus, since it’s a space I personally knew little about.

With ‘do things that don’t scale’ at the top of our mind, our MVP was not really a product at all. We spent lots of time talking to potential customers on both sides, seeing what it would take to broker sponsorship deals.

We created some Airtable lists to keep track of everyone we were meeting, along with a Slack channel to communicate with fellow writers. From there, we pounded the pavement, recruiting participants on both sides, suggesting ‘matches’ and if both sides wanted to connect, we sent an intro email. If not, we didn’t! Airtable and Zapier automations made the entire thing feel more put together than it really was.

Though we had no way to capture payment, manage results, or really anything beyond that initial intro email, writers kept coming back for more and the brands called the process ‘magical.’

Based on this reaction from our earliest users, we felt confident that we had an opportunity to create value for users. We hadn’t yet committed to Swapstack full time, and we still needed to learn how much value we could create and whether we could capture some portion of it.

v2 of the MVP was designed to answer these questions. We launched Swapstack Beta at the end of January, which was essentially an invoicing tool and not much else. Writers could log in and cut invoices to the brands they met through us. While debate about what cut is too much to take from creators on various platforms is a hot topic today, we decided that our take rate from creators would be 0%. Instead, we added a 10% fee to every invoice, so that we could send writers exactly the amount they charged.

Our “product” now encompassed the beginning (introductions) and end (payment) of the sponsorship experience, with nothing in the middle. And, to our amazement, people started using it. In January, writers submitted 89 intro requests with a 45% approval rate, and invoices totaling $500. In February, we saw 140 intro requests (similar approval rate) and $3,000 in invoices.

Although we were seeing promising results, the discussion around whether to go full time, whether to raise a round of financing, or generally what the big picture might be still loomed.

And then, something happened that fundamentally changed the very tenor of that conversation.

A buyer came in.

On Deck or Not On Deck

Before all this, I wrote a piece about On Deck (OD) that was—up til then—my most successful by far. Afterwards, I stayed in touch with Erik Torenberg and David Booth, founders of OD. They’d occasionally ask me questions about company strategy, to which I’d respond, ‘you know I don’t actually work for you, right?’. After enough times, their answer became, ‘well, maybe you should’.

That kicked off a series of conversations exploring what a role at OD could look like for me. Unbeknownst to me, other Jake was having similar conversations. When we started working on Swapstack together, we both told the other about these conversations, and that our ability to commit to Swapstack might be impacted by their outcome.

The conversations dragged on, and Jake and I got to building (see previous section). Eventually, we started seeing some real traction, and the conversation between us and OD shifted to an acquisition exploration. Yes, Swapstack was comically early at the time, but we were getting increasingly fired up about its potential, and OD became excited about the possibility of bringing us in to build it internally.

The prospect of selling a company that had barely just started, securing super cool jobs at a hot, rocket ship of a startup, and removing any short-term financial pressure proved too tempting to turn down, and we agreed to move forward. Though it wasn’t terribly straightforward, we closed the deal for an undisclosed amount and started working at OD in early April.

The narrative was compelling: OD had multiple fellowships for creators (writers, podcasters, and more on the way), and we were coming in to lead what would eventually be OD’s creator business. The Swapstack marketplace would be one component of many in this eventual broader creator organization.

It wasn’t long after, though, that our two companies started to drift apart.

OD—a fast growing and early-stage company in its own right—eventually decided to focus more on startup founders and less on creators, as its major announcement today testifies.

Meanwhile, Swapstack’s core marketplace started looking like a real business, and we decided to focus on expanding it rather than on building a big, new org which would inevitably distract us.

Eventually, we both realized that for Swapstack to reach its full potential, it would need to break free of the OD umbrella, and mutually decided to spin the company out. The move would allow Swapstack to become its own independent company once again, with Jake and Jake no longer employees of OD.

That brings us to where we are today—the OD spin out is nearly complete, and Swapstack is off to the races.

In case you are wondering how sincere OD’s desire was for Swapstack to reach its potential, they’re putting their money where their mouth is: OD is our first investor, and Swapstack is also participating in the brand-new ODX accelerator which was announced today.

Our time at On Deck was highly valuable—between advisers, customers, and collaborators, we are more likely to be successful because of our time at OD—and we think ODX will prove to be the same.

Swapstack 2.0

That’s the story, now let’s talk about the business. First I’ll describe what problems Swapstack solves, how it works, and what it looks like. Then we’ll talk about how it’s going. Finally, I’ll share some vision for where we think it could go, and how the fund raise fits into that vision.

Problems

I already described the difficulties that creators encounter in running an ad-supported business. At first, we were primarily focused on solving problems for creators:

How do you get the attention of a brand?
How should a newsletter ad be priced?
What does a pitch look like?
How can you convert a single ad to a long term relationship?

Over time, we started to better understand the problems that brands face too:

How do you identify the right creator?
How do you manage potentially hundreds of individual creator relationships?
How can you close a deal with creators quickly and efficiently?

Our goal with Swapstack is to alleviate these issues and help brands unlock the power of creator marketing without the headache.

Product

The current Swapstack product is oriented around a marketplace with two sides: on one side we have brands (demand) looking to purchase ad space, and on the other side we have newsletter writers (supply) looking to sell ad space.

The process is as follows: after signing up for Swapstack, participants in the marketplace can browse listings from the other side in the gallery. Either side can initiate a request to the other side (we call these relationships) alongside a pitch explaining why the sender’s brand or newsletter might be a good fit for that of the recipient.

Relationships work on a double opt-in system. If the recipient approves the request, we introduce both sides (today it’s via email, in the future we will have messaging on platform) to finalize the details of their sponsorship.

When the two sides eventually come to an agreement, we ask them to use our invoicing tool to request payment. Our revenue comes from a 10% fee we add on top of the invoice charged to the brand. Our goal remains to be the most creator friendly platform out there, so we send writers 100% of their asking price on every transaction.

Lastly, users on both sides of the marketplace manage everything on the Swapstack dashboard. We’re always adding new features, and if there’s anything you’d like us to consider, feel free to add it to our feature request board here.

Results

The results have been very encouraging so far. Like any business, there are lots of metrics we look at to assess the health of our business. The most important one—as it is for most marketplaces—is marketplace gross merchandise value (GMV), which is a measure of the total dollars earned by creators via Swapstack. After launching the ability to invoice through the platform in late January, we hit a cumulative GMV of $100K in June, $200K in September, and are on track to hit $300K in October.

We also look at a long list of metrics that are an input to GMV, but I’ll try to keep it concise. GMV is a function of the number of transactions and the average size of each transaction. The number of transactions is a function of the number of approved relationships and the conversion rate from approved to paid. The number of approved relationships is a function of the number of total relationships and the approval rate. And the number of total relationships is a function of how many unique newsletters and brands initiate relationships, and how many relationships they each initiate on average.

At each of these levels we’ve been encouraged by what we’re seeing. For brevity, I won’t share numbers for each and every one of these levels, but we have all of this data available. This chart summarizes our input metrics quite well:

Flywheels

This is The Flywheel, so of course I must include some discussion on the flywheels we’re building here.

Note: I so wanted to include some flywheel drawings here, but unfortunately I discovered this morning that my iPad pencil was the unfortunate victim of a backpack-crushing. I will update this piece with said drawings as soon as I can.

Network Effects Flywheel

The first is not overly unique: we run a marketplace, and like many marketplaces it has network effects. This means that when a new user joins, the product becomes more valuable for every other user, both current and future.

On one level, this is rather obvious. Of course you’d rather join a marketplace with lots of options over one with fewer. Mathematically, it’s also obvious: the number of total possible relationships on Swapstack is equal to the number of newsletters listed times the number of brands listed. This suggests there’s at least a possible exponential effect from each new user who signs up.

But in practice, there are subtle ways in which this advantage manifests:

We have seen that users who participate in a successful relationship in their first week are more successful overall than users who don’t. To support this, we do a lot of different things when a new user signs up to get them off on the right foot. When a brand signs up, we try to have as many writers as possible send them requests as soon as we can.

At the beginning, this was tough: we’d often have to manually broker deals between the new brand and one of the small number of writers on the platform who might be a fit. We spent a lot of time and lost a lot of deals that way. Now, though, there are enough writers on board that we simply tag a bunch of users in Slack when a new user joins, and each new brand receives 5-10 requests on their first day.

When a brand with a sufficiently large budget joins, we offer them a white-glove service, in which we essentially handle the manual work of choosing newsletters and coordinating the details. Although this is a lot of effort on our part, we think it’s worth it to give the brand a great experience.
Early on, this was nearly impossible. We simply didn’t have enough users to fill the brand’s budget. We tried 3-4 times earlier on, and couldn’t deliver against hte brands’ goals. Lately, though, this has become not only possible but increasingly easy, and we are now successfully managing multiple simultaneous campaigns. The next step for us is to build products that make this entire experience easier so we can scale this even further.

Supply -> Demand Flywheel

A recent Lenny’s Newsletter piece talked about different types of marketplace advantages, and it described one we’ve naturally observed: when supply becomes demand or demand becomes supply. The examples from Lenny’s post were Lyft, where riders might enjoy their experience and then decide to become a driver, and Airbnb, where guests become hosts.

We’ve seen this go both ways thus far with Swapstack, but I’m most excited by our supply (writers) becoming demand (advertisers). This is how it works:

A writer signs up for Swapstack and starts selling ads.
Eventually, they are so successful, they realize they can actually pay to grow their audience (feeding their own flywheel, as a larger subscriber base allows them to charge more).
They sign up as a brand on Swapstack and buy ads in other newsletters.
Their newsletter grows, and their invoices on Swapstack get larger.

We’ve seen this happen quite a few times; perhaps my favorite example is JR Raphael of Android Intelligence, who never monetized the newsletter until he started working with us earlier this year, is now buying ads on Swapstack too, and expects to earn enough to go full time on it in early 2022.

Vision

The marketplace is just Swapstack v1. We have the chance to become the way every company buys ad space from creators of all types. We’ve started with newsletter writers, but plan to expand to others, including bloggers, twitter influencers, podcasters, community managers, and more. Already, many of our creators are active on other mediums and are starting to use Swapstack to find sponsors beyond their newsletter. On the brand side, we are focused on servicing larger brands with bigger budgets.

Now’s the perfect time for Swapstack.

Digital media advertising has become increasingly challenging for brands. I saw a tweet recently that said that 30-40% of all venture capital dollars go directly to Google or Facebook for digital advertising. That would be fine if the ROI was there, but the cost to advertise on these platforms has increased dramatically in recent years.

Google and Facebook offer precise targeting in a way that nobody else can replicate. However, feed-based advertising results in extremely low engagement & the introduction of new device-level privacy updates like iOS14 have completely disrupted attribution and measurement. That, in addition to rising CPMs (and thus, CAC), has driven brands elsewhere.

Creator marketing provides the ability to target specific, extremely engaged audiences through a trusted voice. That combination drives high ROI.

Brands know this—already, $14B is spent on creator & influencer marketing, and we think that will only continue to grow. Brands increasingly are on board with this, and are mainly turning to their marketing teams and agencies to help them figure out how to buy these ads.

Agencies & internal marketing teams are consistently looking for the best, most impactful growth channels and tools to use to hit their business objectives. Swapstack will become one of those tools, to enable these teams to reach & advertise through creators at scale.

Meantime, it’s never been easier for anyone to make a living ‘creating’ online. There are tons of different monetization options, but sponsorships/ads has and always will be one of the more compelling.

So with tailwinds on both sides of the market, we think now’s the time to go for it, and we’re raising a pre-seed round to get us off on the right foot.

Fundraise

We’re looking to raise $750,000 on a SAFE with a $10m cap. If that looks like a foreign language to you, you might feel better when I tell you that it did for me too only a few weeks ago.

If you’ve ever watched Shark Tank, you’re likely familiar with the valuation and ownership % question. “I’ll give you $50,000 for 10%” equates pretty neatly to a valuation of $500,000.

In startup-land, companies as young as Swapstack don’t typically have a real ‘valuation’. This is because valuations are a function of profits, and most companies at this stage don’t have profits now and don’t plan to have profits anytime soon. A valuation, then, would be totally made up.

Additionally, if you sell a certain % of equity at a real valuation, that’s legal and administrative work that actually has to happen, and that can get expensive for early stage companies.

The standard is now to use a SAFE, instead, which stands for Simple Agreement for Future Equity. For all intents and purposes, $750,000 on a SAFE with a $10M cap is equivalent to 7.5% of the company at a valuation of $10M, but it makes things easier because the equity isn’t actually provided now; instead, it’s granted in the event of a future priced round (like a Series A) or an exit. You can read more about SAFEs here.

We’re in ‘find product-market fit’ mode, which means we’re going to use these funds to hire a lean but mighty team to keep experimenting ‘til we get there. We love the traction we have so far, but we don’t think it’s true PMF just yet. This recent thread explains the difference, and we’re trying to avoid the pitfalls of premature scaling.

About half of it will go towards paying the team (which is me, Jake, and our phenomenal growth lead Vidya, and 3-4 additional folks we’ll look to bring on in Q1 2022) for 12-18 months. The other half we will use for 1) software costs, 2) liberal use of Fiverr and Upwork resources to do undifferentiated heavy lifting for us, and 3) to have the option to go faster when we feel the time is right. We think it would be risky to raise less, and then need to raise another round right at the time where time is most critical.

If you are an accredited investor and are interested in getting involved with the raise:

Book a meeting with me and Jake

If you are a brand or creator interested in exploring Swapstack:

Sign up for Swapstack (it's free!)

Anything else? Reach out to me via email or twitter and let me know!

I have had more fun working on Swapstack than anything else I’ve ever worked on professionally. Through this process, I’ve learned a lot about what I like doing, what I don’t like doing, and how wrong I was about some of that in the past.

Although it has certainly cost me the ability to consistently publish in The Flywheel, I couldn’t be more thrilled to keep going on Swapstack, and I’d be honored to have any of you along for the ride in one capacity or another.

That’s it for today’s edition of The Flywheel. Thanks a ton to Jake and Tanya for helping out with this one. Let me know what you thought of this piece by clicking one of the links below👇🏼.

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The Flywheel

Swapstack Goes Off (Deck)