CEO Review: From a monthly loss of 2.6 million dollars to achieving profitability, how did Medium "cut off its arm to survive"?

CN
10 hours ago

How to Save a Startup That Even Investors Don't Want?

01 Introduction: Falling into a Hole and Climbing Out

In 2022, Medium was losing up to $2.6 million a month, and paid subscribers were continuously dropping, so this massive expenditure couldn't even be considered an investment for growth. Internally, we felt somewhat embarrassed about the content we were spending money to promote, which we touted as success stories. Our users were even less polite, bluntly stating that the platform was filled with "get rich quick" garbage content, and even worse.

Soon after, the entire venture capital ecosystem's funding chain broke. There was no more investors' money to fill our increasingly dry bank accounts (of course, we didn't deserve investment at that time). No buyers in the market were willing to take over a complex, shrinking, and costly mess. However, this made decision-making simpler: either make Medium profitable or shut it down.

The predicament at that time was far from just that, but fortunately, there was always a group of people who genuinely wanted to see Medium succeed. The trajectory of this story resembles the classic plot "Man in Hole" by writer Kurt Vonnegut: we were once riding high, then fell into a deep pit, and ultimately climbed out with great effort.

02 Former Glory: Minimalist Design and a New Business Model

The "riding high" phase was thanks to former CEO Ev Williams. He founded this company after previously starting Blogger and Twitter. Now he has stepped back to serve as chairman and largest shareholder, while still enthusiastically sending a lot of messages to the current CEO (that is, me).

Ev led two eras here. The first was the "design era," where the team redefined what a writing platform looked like, making every aspect of the user experience both simple and beautiful. The second era saw him create a brand new business model, breaking free from the harmful incentives of advertising and instead offering a unique bundled subscription service that allowed all creators to share in the profits.

The problem lay precisely in this business model. It turned out that to operate it well, we had to realize our grand vision of "creating a better internet," serve both readers and authors well, operate as a healthy business entity, and resist speculators, junk information, and internet trolls. This was incredibly difficult.

03 Medium's Content Quality Crisis

In July 2022, I took over as the second CEO, tasked with two major missions: saving content quality and restructuring the company's finances. As mentioned earlier, the financial situation was "urgent," and the quality of the content we were spending money to promote was equally concerning.

By the time I took over, we had repeatedly tried and failed to improve content quality, much like the story of "Goldilocks": we tried methods that were too costly and failed; we also tried seemingly low-cost methods (but with huge actual expenses) and still failed. We urgently needed to find that "just right" balance.

Note: The "Goldilocks" story comes from a classic British fairy tale "Goldilocks and the Three Bears," and in this context, it expresses that in any system, there exists an optimal balance point that avoids the pitfalls of both extremes.

Fairly speaking, Medium's content quality had a few shining moments. The first was from 2012 to 2017, when we didn't even have a subscription service; Medium was the purest and most intelligent writing home on the internet, gathering a group of truly thoughtful individuals wanting to share information. The second was from 2017 to 2021, when we hired a "regular army" of senior media executives and editors to create thousands of professionally written articles.

The end of that high-end professional editing team era was due to both financial issues and the company's mission. At that time, I was an active user and publisher on Medium, and I felt deeply about the mission. From a strategic perspective, spending money to hire professionals to produce high-quality content to attract paid subscriptions seemed reasonable.

But as a member of the community, I felt that these external "professionals" were competing with us, the native community members, for writing opportunities. Professionals were taking the stage away from amateur creators, but in reality, we amateur creators were the foundation of the platform and most likely to share unique and commercially valuable personal experiences. The best state for Medium was to provide a platform for those who didn't want to be professional content creators, as we believed that these voices (that is, your voices) often contained the most valuable stories. The internet shouldn't only belong to professional media practitioners, influencers, speculators, and content creators. There must be a place that understands the value of user-generated content (UGC), the value of people sharing professional or academic insights, and the value of lessons learned from living interesting lives and writing them down.

When I joined as CEO, I increasingly felt the heavy cost of that "professional editing period." Although that team brought over 760,000 paid members to Medium, it also lost a significant amount of money. One of my core tasks after taking office was to work hard to fill the debt hole left by that period.

After the professional editing period, there was an 18-month quality low. As investor Bryce Roberts said, "When your product is just burning money, you can always find the so-called 'product-market fit.'"

At that time, we were burning money, naively thinking it was incentivizing the platform's old users. In hindsight, it unsurprisingly attracted a large number of new authors with questionable motives.

By mid-2022, readers were complaining that Medium was filled with endless "get rich quick" scams; founder Ev also complained that the platform was rife with "clickbait" and nearly thoughtless summaries of others' content. At that time, a foolproof "viral" formula was: find a Wikipedia article, slap on a viral title, rewrite it in an exaggerated, emotional "broetry" style, and then sit back and wait for the money to roll in. Such an article could earn you $20,000.

I completely agree with Ev's view: Medium's foundation is to be a mission-driven company. Our mission is to "deepen people's understanding." Yet, too much of the content we were buying lacked true insights and completely deviated from our mission. This made us reflect: what are we really here for?

Regarding quality improvement, we introduced the Boost mechanism, adding human curation and professional judgment to the recommendation system. We adjusted the incentive rules of the Partner Program to reward thoughtful, substantive works. We also added the Featuring function, allowing publications to directly promote the high-quality content they recognized—the core idea being that readers should have the final say in whom to trust.

No one would say this process was easy, and we wouldn't dare claim that these systems are now flawless. But today, the articles that stand out on Medium are worlds apart from those in the past. This allowed us to confidently declare last year that we are building a better internet—one that values deep thinking and genuine connections, rather than misinformation and divisive conflict. No one accused us of being boastful; this is one of the many signs of our success.

04 Internal Governance Chaos, External Investor Disillusionment

At the bottom of the abyss, there were two groups of people tied to Medium's fate: investors and employees. (Of course, there are also readers, authors, and editors!)

Investors had long lost hope in us and had no interest in helping us climb out of the predicament. This was normal for them. They had anticipated that some investments would go down the drain, and once that happened, they would pull out. We were a failure case in their investment portfolio.

Meanwhile, our team unrealistically wanted to climb out of this abyss. I believe it was Medium's core spirit that inspired every employee here during those darkest moments. And I haven't even mentioned how dire the situation was.

Medium's future depended on the relentless efforts of this team (and future members) over the coming years. However, all decision-making power and profit distribution were heavily skewed towards those investors who had long since abandoned us.

We owed these investors $37 million in overdue loans. Folks, this means that on paper, we were already bankrupt.

Additionally, investors held $225 million in liquidation preference. This is the most common investment term for startups, simply put, it means that during liquidation, investors get their entire investment back before employees. In a booming market, when startup valuations are inflated, this is not a problem.

But in tough times, with the company technically bankrupt, this clause essentially told all employees: the fruits of your hard work over the next few years will 100% go to those investors who have long since vanished. This was devastating to employee morale.

In short, the loans and liquidation preferences represented the painful financial cost of our fall into the abyss. The situation was actually worse; to give everyone a complete picture, I must lay it all out.

Accepting such a massive investment led to our extremely chaotic governance structure. You might think that as CEO, I am the boss. But for major decisions, I must obtain the investors' approval. And at Medium, this meant I needed the majority vote from five different batches of investors (don't forget, they had long since stopped paying attention to the company). To make matters worse, according to venture capital fund practices, these funds, after operating for a certain period, would consider packaging their assets for sale to "scrap buyers." This meant that our governance rights would shift from a group of investors who, while indifferent, were somewhat predictable, to a group of completely unknown and unpredictable investors.

Oh, to complicate matters further, we also owned and operated three other companies.

This is the bottom of the abyss. The best advice I received at that time was: "Don't be a hero." This came from one of our investors. He pointed out that a common flaw among entrepreneurs is thinking they can solve any problem with cleverness. But all the aforementioned predicaments meant that no matter how imaginative our self-rescue plan was, we would be stuck due to an inability to recruit talent or make significant decisions. Even heroic execution could be undermined at any moment by any investor pulling the rug out from under us.

05 The Only Way to Climb Out of the "Hole": Achieving Profitability and Capital Restructuring

In the end, we did not run out of money, did not get sold to a private equity firm, and did not file for bankruptcy. On the contrary, starting in August 2024, Medium became profitable.

We also successfully renegotiated loans with creditors, completely eliminated the liquidation preference, simplified our governance structure to one batch of investors, sold two acquired companies, and closed the third.

Looking back on all this, it feels like we accomplished an exceptionally daunting task. Due to content quality issues, we couldn't simply cut costs. Because if we only did that, we could indeed become profitable, but we would be selling content that made us feel ashamed. This might be a commercial success, but in our view, it would be a failure of our mission and a waste of life.

So we had to retain enough of the team for quality innovation (as mentioned above), but at the same time, we had to drastically cut costs, find a growth path, and renegotiate with investors.

The team's performance was outstanding. I think I did pretty well too. Before joining Medium, I had 15 years of experience as a CEO of small companies, and I always viewed achieving profitability in my own startup as a point of professional pride. I have always believed that this is the true essence of entrepreneurship.

But I did have two "superpowers." First, my experience running small companies gave me the opportunity to gain insights into every aspect of how a company operates, often because I had to be hands-on with many tasks. Second, in the realm of social media platforms, I doubt there is a more "hardcore" Medium superuser than me. I have used this platform deeply in almost every possible capacity: from an amateur writer to an opinion leader, from promoting a business on the platform to being a daily newsletter author, and even creating three of the largest publications here. Nearly 2% of Medium's page views come from my publications and articles.

06 Achieving Profitability: Increasing Subscriber Numbers, Reducing Costs, Streamlining the Team

To achieve investor restructuring, a delicate timing was required: the company had to look good enough to be worth saving, but not so good that investors had other options.

Therefore, while addressing content quality, we first tackled financial issues. This is a basic financial risk that everyone understands: we were spending more than we were earning, and the balance in our bank account was decreasing month by month, ultimately leading to depletion of funds and bankruptcy.

The gap we ultimately filled was from a loss of $2.6 million per month in July 2022 to a profit of $7,000 in August 2024. Since then, we have maintained profitability. We set aside some profits as reserves for emergencies, but primarily reinvested it all back into improving Medium itself.

Conceptually (not strictly numerically), we divided this financial turnaround into three parts: increasing membership, reducing costs, and streamlining the team.

  • Increasing Membership. This is undoubtedly our proudest achievement. When I first took over, our subscriber numbers were shrinking. When I mentioned the poor content quality, it also meant that users were equally disgusted and unsubscribing at an alarming rate. Now, the situation is vastly different. By reshaping the platform's quality standards, we proved that people are willing to pay for thoughtful and insightful writing. This is a valuable vote of trust for a better internet.

  • Reducing Costs. This also fills us with professional pride. Cost reductions mainly came from our cloud service expenses, which dropped from $1.5 million per month to $900,000. Behind this was a lot of engineering optimization and strict cost control discipline. A popular internal slogan at Medium is "ladder," where each step up means saving or creating $10,000 in value. We don't care whether this money comes from growth or cost-cutting, so we are happy to achieve fruitful results in both areas.

  • Streamlining the Team. This is a topic worth discussing, yet difficult to express with enough respect; I know it is very sensitive. Medium's employee count once reached 250, but now it is 77. I don't fully understand the entire history of the previous rounds of layoffs, but I did lead one of them. I just want to say two things: first, no decision-maker in the company has ever taken layoffs lightly; second, for a poorly managed company, layoffs are a harsh reality. Today, the 77-person Medium is a healthy business, while a staff size of 250 would lead to bankruptcy.

In the process of cutting costs, we also learned a painful lesson from our office lease. Leases often last several years longer than you actually need, which is common. But you have no choice—sometimes to rent an office, you have to sign a contract that lasts longer than your cash can support. In normal times, there is a sublease market, and if your company cannot afford the rent, you can find someone to take over.

However, we were paying $145,000 per month for an office in San Francisco with 120 workstations, but we no longer needed it. Like many companies during the pandemic, we implemented remote work. Similarly, our employees were scattered across the United States. So we had no use for this office during the pandemic, and after the pandemic, there weren't enough Bay Area employees who needed it. We are now determined to become a fully remote company, and the concept of an office has become obsolete for us.

Unfortunately, almost all companies experienced the same situation, leading to a sudden collapse of the sublease market. Our landlord was extremely tough during renegotiations, and we even began to suspect that they, under pressure to report to their own investors, needed to falsely report the building's occupancy rate, counting our paid but vacant floor as "occupied." In that seven-story office building, which had about 800 workstations, typically fewer than 20 people were on-site any given day, and none of them were ours. We tried every possible way to terminate the lease, even offering to pay the remaining rent in one lump sum just to recover some property and cleaning fees. But the landlord refused for a long time, and we guessed it was because they needed paying tenants to maintain appearances while negotiating debts with their lenders. It wasn't until their negotiations were over that they finally allowed us to pay a termination fee to settle the matter.

07 A Necessary Capital Restructuring

This section is about renegotiating with investors.

To be honest, even though I had no relevant background, I quite enjoyed dealing with this mess. Medium attracts curious people, and I am one of them. This mess is one of those business scenarios you might have only heard about in theory but never had the chance to experience firsthand.

An interesting twist is that the frozen venture capital market actually helped us. This meant that we only had two choices: shut down or strive for profitability. If the market environment were healthier, those investors who lent us money might have forced us to sell the company. But in that depressed market, the Medium team actually held the biggest bargaining chip: either give us the motivation to keep working, or we all walk away, and you will lose everything.

This type of negotiation is referred to in jargon as "recap," which refers to the restructuring of the "cap table" (the company's equity structure). Initially, I was very resistant to the whole idea of restructuring Medium because it severely contradicted my understanding of business relationships: if you take someone else's money, you have a responsibility to make money for them.

So I had to undergo a mindset shift. I think all entrepreneurs may need to go through this process, which is realizing that sometimes, unless you clean up the cap table, the company has no future.

On the day before I started, my investor friend Ross Fubini met with me. He seemed genuinely enthusiastic about my plan to save the company, but then he mentioned the idea of capital restructuring. This was the first time someone had brought this up to me, and I was convinced that I would never do something so "brutal" to the previous shareholders. But he was very straightforward: unless I ultimately renegotiated with the investors, any work I did would be in vain. About a year later, I admitted he was right.

So the question remained: how to do it. Typically, capital restructuring is led by an external new investor in a "white knight" role when a company faces a "death threat." All old shareholders face a choice: either accept the terms set by the new investor or watch the company run out of funds and die.

But we had no options for external investors, both because the venture capital market was frozen and because even in a good market, we were not worth investing in due to our lack of "venture-scale" growth.

Thus, I learned about two other forms that this "death threat" could take. The first, aptly, came from an article on Medium titled "Clean Up Your Own Shite First."

The investor who wrote that article, Mark Suster, pointed out that, for the sake of maintaining relationships within the industry, new investors are often reluctant to be the "bad guy" forcing a restructuring. They prefer the company's management to take the initiative. And the way to do that is for the management to threaten collective resignation.

As a side note, this perfectly illustrates what I call the "commercial value of amateur writing." The industry insights shared by this amateur author created millions of dollars in value for all of us. If you are a paid author on Medium today, you could say that all of your income is thanks to Mark's article. Long live user-generated content (UGC)!

To be honest, the strategy of "management threatening to resign" was far beyond my style and experience. It was no longer just a matter of me never having seen a capital restructuring; I am not the type to issue an ultimatum to investors for over $200 million in investment equity. However, the logic was clear, and I ultimately accepted that without this restructuring, Medium would fail in the future, and my work during this period would be in vain.

So I began to walk that path, arguing that without restructuring, there would be no incentive for employees, but later realized we had $37 million in loans coming due, involving multiple investors. So this was an additional, more explicit "death threat."

The rationale I presented to the loan holders was to convert their loans into equity; otherwise, the management would walk away, and then propose terms for capital restructuring to other investors to create enough equity for them.

Essentially, a capital restructuring involves two things. Investors give up their special rights, such as liquidation preferences and roles in governance decisions. Additionally, they typically accept significant dilution, so if they once owned 10% of the company, they might only own 1% afterward. Therefore, capital restructuring is sometimes referred to as "cram down rounds," as the ownership of existing investors is compressed into a smaller pool, making room for future teams and future investors.

This restructuring was formally packaged as a new round of financing. But Medium had already gone through too many rounds of financing; we had rounds named XX and Z. So our lawyers referred to this as the "A prime round," giving us a name that represented a fresh start.

For the previous investors, there was a part of the restructuring that helped balance fairness, which was that they all had the right to participate in this new round of financing. Although the terms of the restructuring were quite aggressive, the participation rights theoretically prevented you from diluting the old investors' shares to zero. In our case, only 6 out of about 113 investors participated. I believe this low participation rate is a clear signal that we did not offer unreasonable, favorable terms for ourselves.

In addition to negotiating terms, completing a restructuring involves a lot of relationship work: with investors, former employees, and current employees.

Investors are actually quite easy to deal with. I think this validates many truths about startup investors. The top-tier investors (and we have some big names) are more reliable as partners. These investors are in the business of pursuing "home runs" rather than nitpicking over small deals. So they won't try to squeeze a few cents out of such transactions. They are also in the relationship business, so they will try to avoid causing trouble because they don't want to have a bad reputation among entrepreneurs. I never thought I would become a cheerleader for venture capital (VC), but after this experience, I can easily speak highly of Ross from XYZ, Mark from Upfront, Greylock, Spark, and a16z.

One theme throughout all of this is that old companies can be "written off" by the market. This is reflected in many former Medium employees. I have actually become friends with many of them because I rented space in different Medium offices over the years. The equity of these long-time employees has also been significantly diluted, so I called some of them to explain that their current equity is very likely worthless, and the restructuring might make it worth slightly more than zero, but doing so means their work building Medium won't be in vain. For a few individuals, I even suggested that if they really wanted valuable Medium equity, they should come back to work here. If you work at a startup and belong to the "equity isn't worth the paper it's printed on" camp, then here you have a perfect case study illustrating why this is often true. These former employees had no power to stop it—I called out of a sense of responsibility.

That leaves the current employees, some of whom have equity dating back to the company's earliest days. They have also been diluted. I was troubled by this for a while, but the logic of restructuring ultimately prevailed. To justify the restructuring, you must demonstrate that you are cleaning up the incentive mechanisms for the future team. This means that everyone's past efforts have been diluted, and only future efforts will be rewarded. So we issued new equity grants with new vesting periods, but did not replace any old equity grants. This included me. It is also quite straightforward to explain that their previous equity is most likely worthless: high exercise costs, hidden behind significant liquidation preferences, and tied to a company that cannot repay overdue loans. I have been using the term "most likely" because we really never know how much a company is worth until someone tries to buy all or part of it. However, after the restructuring, the current liquidation preference is lower than the company's current annual revenue, so we believe the equity is now more likely to have value.

All of this marks that we have emerged from the predicament. We have clean finances, profits, a product we are proud of, and a simple company structure. I increasingly appreciate our lawyers pointing out that we are making a fresh start.

Now we often remind ourselves that we are doing this work for a reason. I can't say there is any rational reason for doing this work, other than my love for reading and writing, which I fell in love with many years ago because this company also loves reading and writing, and now I want to see what we can build on a solid foundation. I have been the CEO here for three years, but I have loved Medium itself for 13 years. So for me, no matter how impractical it may be from a business perspective, saving this company feels worthwhile.

08 Appendix

I just want to record some things that are not quite suitable to be included in the story, which is already long.

  • To bridge the gap between our decision to undergo capital restructuring and the actual restructuring, we launched a "Change in Control (CIC)" plan to benefit employees. This is like a contractual equivalent of equity, a rather rare tool, and I am willing to share the documents we used with any entrepreneur who thinks they might need such a tool. It was ultimately replaced by the capital restructuring but filled a gap to ensure that if the restructuring failed, the employees here could benefit from their work.

  • I completely overlooked the team's psychology. This is an important part of turning around the business because the starting point is a team that has gone through a series of failures, and it is unclear why the newcomer (me) is not just the next failure. I ultimately relied on the advice from the book "The First 90 Days" about "finding your allies," as well as the overarching theme that we need to build confidence in the plan. I think I read the last part in an HBR article, but I can never remember which one.

  • There was also a $12 million loan that was not overdue. This loan was converted into equity as part of the capital restructuring.

  • Startup valuations sometimes have a lot of vanity components. Our peak valuation reached $600 million, and I have no vanity about our current valuation. But I won't tell you because I don't want that to be used as a basis for comparison with other startups. We are profitable, and they are not. This comparison point is more favorable for us!

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