Like so much else, the Germanic Substrate Theory is complicated and disputed. I will lay out what it is, and what the arguments in favor and against it are.

First, though, I want to clarify some terminology: “proto-Germanic” is the language which is the ancestor of the modern Germanic languages, and “pre-Germanic” is the language which was spoken in the area proto-Germanic was spoken before its arrival; pre-Germanic and proto-Germanic are unrelated ancestrally.

OP, you are correct about what the substrate hypothesis is--the substrate hypothesis claims that proto-Germanic, the ancestor of modern German, English, Scandinavian Languages, and others, is the result of creolization between an Indo-European dialect and pre-Germanic. To briefly lay out the case in favor of the substrate hypothesis: proto-Germanic, although complex grammatically, is much simpler than its ancestor, proto-Indo-European, or sister languages of similar ages, such as Latin, Ancient Greek, or Sanskrit. Secondly, proto-Germanic has a large number of words (around 25%) for which the etymology is uncertain, and, a proponent of the substrate hypothesis would argue, non-Indo-European.

(It would be remiss not to mention that the substrate hypothesis’s advocates don’t claim that Grimm’s Law, or Rask’s Rule, and Verner’s Law, the central phonological changes which characterize Germanic languages, are the result of language contact with pre-Germanic--the consensus is that these were independent developments).

The opponents of the substrate hypothesis have generally fallen into two camps: those who doubt the claims of non-Indo-European etymologies, and those who accept the claims of the etymologies, and doubt the claims of creolization. The first camp claims that the issue of non-Indo-European etymologies will more or less be solved by working harder--it’s not that those proto-Germanic words aren’t from proto-Indo-European, it’s that scholars haven’t yet figured out how they’re from proto-Indo-European. The second camp acknowledges that there are many proto-Germanic words of a non-Indo-European origin, but don’t agree that this is a result of a process as dramatic as creolization. Lastly, a third camp argues that the substrate theory should really be a superstrate theory, and that borrowings of this frequency are nearly unheard of from a substrate language. (I should note that this argument has been made both genuinely and sarcastically--the genuine argument that this is really a theory that should be considered, and the sarcastic argument that this is so ridiculous that obviously this 33% of words is Indo-European in origin).

One of the issues with this first camp is that it’s very labor-intensive to produce reasonable etymologies, especially for words that don’t have obvious ones. As such, it’s a very hypothetical train of thought. For example, Roland Schuhmann, in his 2016 paper Where is the Substrate in the German Lexicon, suggests non-substrate etymologies for the proto-Germanic roots *kraƀita-, *krabba- ‘crab’, *karō ‘mourning, sorrow,’ *kređōn- : *kruđ(i̯)ōn-? ‘Toad’ and *speru- ‘spear’. On the basis of these four roots, Schuhmann argues that the hypothesis that ⅓ of proto-Germanic roots come from another language is an untenable one. Certainly there is some truth to this--of the ⅓ of proto-Germanic roots of uncertain etymology, some are likely to come from Indo-European roots, just which ones they are, but how many they are, is as of yet, unknown--and if the correct number is, say, ¼ of proto-Germanic roots, then the substrate hypothesis is far from disproved.

The second camp argues that proto-Germanic was not a creole language, although there were significant, large borrowings from pre-Germanic into proto-Germanic. This argument rests mainly on the definition and characterization of creole languages. Creole languages generally have very simple grammar, and generally lack semantic noun suffixes, which Germanic languages have. Instead, they argue, pre-Germanic and proto-Germanic formed a superstrate/substrate relationship; further, a language can have a huge influence on another language without creating a Creole.

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Of course, as with any complicated issue of this kind, there are people who argue for a more specific middle ground. In this case, they argue for what is known as the Agricultural Substrate Hypothesis. What this is in very broad terms is that when the Indo-Europeans migrated to the areas where pre-Germanic was spoken, they eventually subsumed the pre-Germanic speakers into their culture and language, but adopted their words for the bits of their culture they adopted. This often takes the form of native flora and fauna, which proto-Germanic wouldn’t have had words for before contact with the plants and animals. The supporters of the agricultural substrate hypothesis, however, argue more specifically that agricultural terms, as well as words for crops, were adopted into proto-Germanic from pre-Germanic.

This also gets at the second part of your question: who were these pre-Germanic speakers that the Indo-Europeans came into contact with? This is unfortunately a very difficult question to answer, but to get any kind of answer we must turn from historical linguistics to archaeology. The predominant culture from the 4th millenium BCE in Scandinavia is the Funnel Beaker culture. Starting around 1000 years after that, c. 3000 BCE, the Funnel Beaker culture comes into contact with what is known as the Single Grave culture, one of the Corded Ware cultures. The Corded Ware cultures are thought to have been vectors more broadly for Indo-European languages’ expansions, and Rune Iversen and Guus Kroonen argue that this interaction--between Funnel beaker and Single Grave--is the interaction between speakers of pre-Germanic and what would become proto-Germanic. Shortly after the start of the third millennium BCE, there are graves which show mixes of characteristic items from these two cultures, indicating a consistent level of cultural contact, the kind which we might expect to facilitate language change. Further, certain aspects of the Funnel Beaker culture survive long after the culture seems to have been mostly absorbed in the areas of the Single Grave culture, and there seems to have been a long-standing geographical border on the Jutland peninsula in Denmark where contact between the two cultures and languages could occur.

In short, I would say that the Germanic substrate hypothesis is certainly a valid theory but that there is significant pushback towards it, especially towards the claim of creolization, since, while proto-Germanic seems simpler than other Indo-European languages, it still has a robust case system which would be uncharacteristic of a creole language. That said, the Germanic languages were certainly influenced, and quite possibly very strongly influenced, by contact with an unknown non-Indo-European language.

Sources:

[Anon.]. "22. Was Proto-Germanic a creole language?" In Germania Semitica, 423-446. Berlin, Boston: De Gruyter Mouton, 2012. https://doi.org/10.1515/9783110301090.423

Pre-Germanic: A tentative description of the substratum language in Proto-Germanic based on Guus Kroonen's Etymological Dictionary of Proto-Germanic, Aljoša Šorgo (2015).

“Where is the substrate in the Germanic lexicon?” Etymology and the European Lexicon. Proceedings of the 14th Fachtagung der Indogermanischen Gesellschaft, 17–22 September 2012, Copenhagen Edited by Bjarne Simmelkjær Sandgaard Hansen, Benedicte Nielsen Whitehead, Thomas Olander and Birgit Anette Olsen. (2016).

“​​Non-Indo-European root nouns in Germanic: evidence in support of the Agricultural Substrate Hypothesis,” by Guus Kroonen, in A Linguistic Map of Prehistoric Northern Europe. Suomalais-Ugrilaisen Seuran Toimituksia = Mémoires de la Société Finno-Ougrienne 266. Helsinki 2012. 239–260Rune Iversen, and Guus Kroonen. "Talking Neolithic: Linguistic and Archaeological Perspectives on How Indo-European Was Implemented in Southern Scandinavia." American Journal of Archaeology 121, no. 4 (2017): 511-25. Accessed August 14, 2021. doi:10.3764/aja.121.4.0511.

Two essays from The Handbook of Language Contact, edited by Raymond Hickey. The first, ch. 12, “Contact and Change: Pidgins and Creole,” by John Holm; the second, ch. 20, “Contact and the History of the Germanic Language,” by Paul Roberge.