The self-proclaimed front page of the internet has been making the front page of just about every other news publication over the course of the last few months. Turn on MSNBC or CNN on any given day, and you’re liable to see pundits discussing r/WallStreetBets, one of Reddit’s most well-known communities. Now, the company is making headlines for a different reason, having just hired their first chief financial officer (CFO) and making inroads toward a Reddit IPO.
TL;DR
- Reddit is currently the 19th most visited website on the internet, with its number of registered users having grown steadily over the past few years
- The site has been the center of controversy numerous times, with everything from alleged stock manipulation (see posts on: “GME to the moon”) to illegally leaked photos of celebrities in the nude, and everything in between.
- The company’s valuation recently doubled from a new Reddit fundraising round, jumping from $3 billion to $6 billion in one fell swoop.
- Most of the revenue that the company brings in is generated from advertising, to the tune of roughly $170 million in 2020.
- The company just hired its first ever chief financial officer, Drew Vollero, in what many see as a move towards going public through a Reddit IPO.
- Reddit’s different communities, called subreddits, range in the topics they cover, spreading from politics to public freakouts to specific video games (if you can think of a topic, there’s probably a subreddit about it).
Reddit’s wild ride: A quick company history
You’ve heard this story before—two college roommates, bored and with their creative juices flowing, work on starting up their own company. For Steve Huffman and Alexis Ohanion, the University of Virginia would serve as the birthplace of Reddit. They founded Reddit in June 2005, after Huffman and Ohanion participated in Y Combinator, a seed company incubator.
Shortly thereafter, in October 2006, the duo sold the website to Conde Nast, the famed magazine publishing conglomerate. The deal was worth an undisclosed amount rumored to be in the $15 to $20 million range.
In 2009, both of the original founders left the company to pursue other ventures, leaving the site under the supervision of Conde Nast. Huffman and Ohanian would return in November 2014 as chief executive officer (CEO) and full-time executive chairman, respectively.
More recently, the company brought onboard Drew Vollero as CFO, who had previously held an executive role at Snapchat’s parent company SNAP, overseeing their move to the public market. SNAP raised $3.4 billion in a 2017 IPO.
The move to bring Vollero onto the executive team comes on the heels of what might be the website’s most influential year to date.
In just a few months’ time, subreddit communities like r/WallStreetBets and r/The_Donald have risen in both popularity and controversy—the prior for its involvement in the rise in price of various stocks like AMC, GameStop, and Bed Bath & Beyond, and the latter for being banned from the platform due to incessant amounts of rule-breaking.
The banning of the r/The_Donald community sparked widespread debate about free speech on the platform, and whether the company’s small list of rules regarding content was adequate in today’s day and age.
Reddit fundraising to know about
Throughout eight rounds of fundraising, Reddit has raised just under $1 billion, totalling $919 million from 27 different institutional investors. Most recently, the company raised $367.9 million during a Series E round of funding composed of four investors, including prominent venture capital (VC) firms Sequoia Capital and Andreessen Horowitz.
Prior to this round, the highest amount Reddit raised in any one round of funding occurred in 2019, when a Series D round led by internet service provider Tencent helped Reddit bring in $300 million in new funds.
Path to the Reddit IPO
With the addition of Vollero in the role of CFO, Reddit has started to prepare for their move to market. Previously, Vollero worked for SNAP. Before that, he was at the toy company Mattel. With his expertise in taking companies public, Reddit could be in solid hands.
Reddit has yet to file the proper paperwork declaring their intent to go public with the Securities and Exchange Commission (SEC), but will do so when they decide on a handful of important factors of their IPO.
First, and foremost, the company will have to settle at an aimed valuation for them to target when they go to market. This target valuation will help to determine how many shares the company issues, and what the initial price will be for each individual stock.
After that, the company will (likely) enlist the help of a financial services company to guide them to market, helping to prepare financial statements and other necessary forms. If it’s a direct listing or reverse merger (SPAC), there may be no underwriter for the deal.
Related: A guide to SPACs
Common underwriting companies used for this step include JPMorgan Chase, Goldman Sachs, and Ernst & Young. Whichever company is hired by Reddit will also help them to determine what stock exchange the company will be listed on.
Will the Reddit IPO date come to fruition and, if so, when?
Reddit’s IPO date has yet to be confirmed, so there’s still a chance that the company will end up pumping the brakes and remaining privately held. While that’s the more unlikely of the two possible scenarios, crazier things have happened. Now, if the company does decide to go public, there’s a strong chance that this won’t take place until after the summer months come to an end.
September, the start of the fall season, also brings in the start of IPO season for tech companies. During the handful of months between September and and the end of the calendar year, many companies make the push to go public to acquire the increased levels of capital as they move into the new year. This is in contrast to the tech selloff in the first half of 2021 in response to inflation, as well as the traditional “sell in May” month.
Risks and opportunities investors should know about
For being the “front page of the internet” for so long, Reddit was considered a relatively underground website until very recently. They received increased notoriety thanks to different subreddit communities. More popularity is always a good thing, right? Maybe.
Investors should look to the way in which Reddit operates as a whole for more insight as to what this shift in popularity might bring to the platform.
Reddit is divided into what are most commonly referred to as subreddits, different virtual communities centered around, well, pretty much anything. If you can think of something, the chances are high that there’s a subreddit for it. With this wide-ranging scope of different topics to learn about on the site, there comes a need for posts and discussions to be moderated.
Enter the volunteer moderator team (each subreddit has their own). These unpaid pseudo-employees hold a great deal of power, and even have the capability to make their subreddits private, essentially making them non-accessible to anybody who wasn’t already a member of the community.
Aside from being exclusionary to members who hadn’t previously joined a specific subreddit, this can pose a clear challenge for Reddit’s actual employees. A site riddled with prior controversies (the CEO once said publicly that racism is permitted on their platform per the rules, but that it’s not exactly welcome), it’s often hard for the company to get out of their own way. After all, it’s tough to claim to be an established and respected company when you have minimal control over what happens on your own website.
All things considered, the upside is just as clear to many. Just look at the r/WallStreetBets community, a group of stock day trading amateurs who claim to have largely no clue what they’re doing, yet nearly single-handedly saved GameStop’s bottom line, taking what was a $10 to $15 stock to a valuation of more than $347 per share at its peak in mid-January.
As a privately held company, Reddit generates the majority of their revenue through advertising on their platform. For those users who don’t want to be bothered by ads on their feeds, the option to purchase Reddit’s “premium,” ad-free membership is also available.
Relying heavily on advertising purchased by other companies may sound like risky business, but investors shouldn’t be scared off by this, as it’s currently the revenue strategy for most social media companies. Just ask Mark Zuckerberg, who put it oh-so-elegantly when asked before Congress how Facebook makes money: ”We run ads.”
Bottom line
Reddit seems poised to continue its recent rise in popularity, but does it have the makings of other social media titans like Twitter and Facebook? One source of security for investors to lean on is the incredibly vast range of individuals that the platform appeals to in one way or another, with more than 2.5 million different subreddits in existence, there is certainly something for everybody.
Still, there are risks present, which investors will want to diligently analyze ahead of the potential Reddit IPO date.