Reddit IPO: Will the “front page of the Internet” go public?

Overview:

• Reddit filed for an IPO in 2021 but has not locked in a date for its listing.
• The company is expected to go public in 2024 at a $15 billion valuation.
• Reddit announced plans to charge for access to its API in an attempt to help the company reach profitability.
• These plans have led to backlash from the Reddit community who are protesting via “subreddit blackouts”.

Is Reddit ready for an IPO?

Reddit, the self-branded “front page of the Internet,” filed for its IPO in 2021. It has raised over $1 billion in funding. Notable investors include Sequoia Capital and Andreessen Horowitz. The company was valued at around $15 billion in 2021 after raising a private fundraising round led by Fidelity Investments. Although Fidelity recently marked down its investment in Reddit by 41% in June 2023. Fidelity also marked down other social media firms in its portfolio including Twitter.

Reddit is now facing a tangle of troubles on its winding road to an IPO. The latest headache? Thousands of volunteer moderators, the lifeblood of the platform, have gone on strike, locking down many of Reddit's popular subreddits in protest of CEO Steve Huffman who plans to charge fees to third-party apps that serve up Reddit content. A move that's left the IPO plans hanging in the balance and likely to face a delay​.

Moderators play a vital role in the Reddit community. They're the backbone of Reddit, pulling double duty by screening content and maintaining the quality of subreddits, all without a paycheck. Researchers estimate they're doing around $3.4 million worth of work annually, for free.

Huffman's got his reasons for wanting to change Reddit's business strategy. The company has been in the red, and these third-party Reddit apps are making revenue from the platform's data. But here's the problem: this move has hit a nerve with the mods who fear these API costs could suck the life out of their vibrant communities. This isn't the only way to get Reddit profitable though, Huffman could increase advertising which is the company's primary revenue stream. Although this could also bring backlash from Reddit users.

Keeping users happy while growing profits is one of the biggest challenges Reddit is up against.

Aside from the API controversy, Reddit has also had to deal with poor market conditions. The IPO market has essentially been frozen for tech companies since late 2021. The company is expected to go public in 2024.

What do Reddit users think about the Reddit IPO?

As we dived into the depths of Reddit, we found quite a mixed bag of reactions to the platform's IPO plans.

Some users appear ready to place their bets, anticipating a surge in the stock price from the hype, only to dump their shares after a sell-off or short​​. This sentiment was more common in the infamous r/WallStreetBets subreddit. Other Reddit users appear more skeptical, likening the IPO to “financial suicide”.

Some users predict a dystopian future for Reddit after its IPO. One user predicts more advertising will overrun the platform, signaling the “demise of Reddit”​​. Other users appear curious about Reddit's financial health, especially on whether the platform makes a profit or runs at a loss, and what its earnings look like.

It's worth noting that sentiment surrounding the Reddit IPO varies between subreddit communities. Overall, I think it's safe to conclude that most of the sentiment is negative. Based on the lengths Redditors are going to in an attempt to derail the IPO by organizing blackouts. Time will tell if their protests will prevent Reddit from becoming a listed company.

Who owns Reddit?

Reddit was founded by Alexis Ohanian and Steve Huffman. Both founders are alumni of the University of Virginia, where they majored in Computer Science.

Alexis Ohanian, known as the internet's own cheerleader, is a well-known entrepreneur and investor. After co-founding Reddit, he went on to establish Initialized Capital, a venture capital firm and also served as the executive chairman of Reddit's board.

Steve Huffman, a web developer, is another co-founder of Reddit and currently serves as the platform's CEO. He's also a co-founder of Hipmunk, a travel website. In addition to his work at Reddit and Hipmunk, Huffman has served as an instructor for the e-learning course “CS253: Web Development,” offered by online education provider Udacity. Huffman was named to the '30 under 30′ list by Inc. Magazine in 2013.

How does Reddit make money?

Reddit makes money primarily from ad revenue, premium subscriptions and the sale of Reddit Coins with the latter providing a small but significant part of its income.

This model is unique in its dependency on unpaid community moderators who maintain many of the site's forums. This decentralized model is both a strength and a vulnerability. On the one hand, it allows Reddit to save on employee expenses, but on the other hand, it gives moderators power over the Reddit user experience. This is evident in the recent protests from moderators who are dissatisfied with CEO Steve Huffman's plans to monetize access to Reddit's data.

What threats is Reddit up against?

Reddit operates in the social media and online advertising market, a highly competitive space dominated by tech giants like Facebook, Twitter, and Google.

As a global media company, its biggest asset is its user-generated content. Users can create their own subreddits, post anonymously and control the flow of conversation. This makes it the go-to place on the internet for niche topics and deep, interactive discussions. Something that differentiates Reddit from its more mainstream competitors.

However, Reddit's community-driven model also comes with risks. While other social media platforms use either paid staff or sophisticated algorithms for content moderation, Reddit relies on unpaid volunteers. Reddit's reliance on these moderators creates vulnerabilities that could potentially ruin the user experience of the platform. Threatening the platform's stability and attractiveness to advertisers and investors.

Reddit's plans to charge third-party apps for data access have already led to a backlash from users and developers. Many of these third-party apps have become key parts of the Reddit user experience and community vibe. Alienating these users and developers could drive them to competitors, such as Discord or Mastodon.

Another threat is censorship and content moderation. Striking the right balance between free speech and maintaining a safe and respectful community is tricky, not just for Reddit, but for all social media platforms. Failure to manage this effectively could lead to users abandoning the platform and potential scrutiny from regulators.

How to invest before the Reddit IPO

Investing in a company before it goes public can be challenging. Especially if you aren't an accredited investor. In saying that, here are some ways you could invest in Reddit before its IPO:

1. Private Equity Funds: These funds pool money from investors to buy stakes in private companies.
   • Pros: This option allows you to invest in companies before they go public and potentially generate substantial returns if the companies perform well.
   • Cons: These funds usually require large minimum investments and have long lock-up periods. They are also only available to accredited investors.
2. Secondary Market Platforms: These are platforms where shares in private companies are sold by employees or early investors.
   • Pros: They provide a platform for investors to buy shares in private companies.
   • Cons: The availability of shares can be limited, and the price can be inflated. It can also be risky as there is often less information available about the company's financial performance.
3. Invest in Related Public Companies: Some public companies may have a stake in Reddit. For example, Tencent Holdings is a publicly traded company with a stake in Reddit. Investing in these companies would give you indirect exposure.
   • Pros: It's a more accessible way for retail investors to gain exposure to Reddit.
   • Cons: Your investment is also exposed to the risks of the other company, and any returns will be diluted.
4. Crowdfunding Platforms: Some platforms allow retail investors to invest in start-ups.
   • Pros: They open up opportunities for retail investors to invest in private companies.
   • Cons: These are high-risk investments, and the platforms may not offer shares in the specific company you're interested in.

Note that investing in private companies carries significant risks and none of the above should be interpreted as investment advice. Thorough due diligence is essential, consult with a financial advisor before making a decision.

Notable investors in Reddit

Reddit has raised capital from institutional investors including:

1. Quiet Capital: Participated in Series E and F rounds.
2. Bienville Capital: Participated in Series F round.
3. Fidelity Management and Research Company: Lead investor in Series F round.
4. Sequoia Capital: Participated in Series E round.
5. Vy Capital: Lead investor in Series E round.
6. Tencent: Participated in Series E round and led the Series D round, owning around 5% of the shares.
7. Puget Sound Venture Club: Participated in Series E round.
8. Andreessen Horowitz: Participated in Series E round.
9. Kjøller: Purchased shares on the secondary market.
10. Dubai VC: Holds approximately 0.56% of outstanding shares.

Frequently Asked Questions