Reddit Inc., once described as the “virtual town square of the consumer internet” announced it had confidentially filed paperwork for an initial public offering (IPO). In its last funding round, held in August of this year and led by Fidelity Investments, the company was valued at $10 billion and raised $410 million, with plans to close out the Series F round at $700 million. In February of this year, the social-media company raised $500 million and earned a $6.5 billion valuation. At the time, the decacorn’s chief executive officer (CEO), Steve Hufman, said that the funding would allow Reddit to control when and and how the platform would go public. According to Crunchbase, Reddit has raised $1.3 billion in its life as a private company. The number of shares to be offered and the price range of the proposed offering will be determined at a future date. According to Reddit, the IPO will go ahead once the U.S. Securities and Exchange Commission completes its review process, subject to market and other conditions. The IPO is expected in 2022, although Huffman said that Reddit has not decided on when it will go public. At present, the company is hiring investment bankers and lawyers to help it see through its IPO.
The content aggregator has struggled in recent years to balance its desire to be a home for communities with a need to police hate speech and misinformation. Reddit also has “ask me anything: digital town halls with experts of specific topics, celebrities, and politicians.
Content moderation surely must weigh heavily on the company’s costs. We won’t know for sure until we get our hands on the company’s S-1 registration document. Content moderation has two countervailing tendencies: on the one hand, the costs of moderation will likely lead to pressure on smaller platforms to sell up to bigger rivals, simply because it becomes too costly for them to moderate content and have a prayer of attaining profitability; and on the other hand, content moderation places costs on platforms that we are still coming to grips with. Artificial intelligence (AI) alone cannot moderate content because speech often carries nuances that AI cannot pick up. That means platforms will need teams of human moderators to at least review decisions when there are appeals. The larger the platform, the bigger the teams. At some point, platforms start to look like banks, with lots of compliance officers and in certain jurisdictions such as the European Union, frequent discussions with regulators over key decisions. Platforms can survive this change, but the real question is whether their profitability will be affected and what it means for competitiveness. Reddit’s financials will tell us just how the company has coped with content moderation.
Meme Stock Frenzy Drove Growth
Reddit has already weighed in on the IPO market: earlier in the year, a post in the WallStreetBets subreddit led to a meme stock frenzy that drove up the price of stocks of companies such as GameStop Corp (NYSE: GME) and AMC Entertainment Holdings (NYSE: AMC). The meme stock frenzy even managed to draw in Wall Street investors looking for investment advice.
According to Huffman, the meme stock frenzy brought in millions of new users, as well as new advertisers for cabinet refinishing. Perhaps realizing the importance of retail investors, Huffman said that he wants the IPO to be accessible to individual investors. Huffman said that he recognized that retail investors typically get the worst price because they are at the end of the queue, when all the alpha has disappeared.
When Tencent Holdings Ltd. (OTCMKTS: TCEHY) played an important role in the company’s $300 million Series D funding round, fears arose that the Chinese company would push for censorship on Reddit due to pressure from the Chinese government, a notion that has since been disproven. Tencent remains a significant shareholder, along with Andreessen Horowtiz, and Sequoia Capital.
Founded in 2005 by Steve Huffman, Alexis Ohanian, and Aaron Swartz, Reddit has grown fast and become bigger than early rivals such as Digg, and become the go-to digital town hall for communities to socialize and get their news.
Advertising forms the greater majority of the company’s revenue. Reddit has enjoyed a lot of success. In February of this year, Reddit aired its first ever Super Bowl ad and in the second quarter, the company earned $100 million in advertising revenue, up 192% from the year prior. However, the company said that it remains unprofitable. As of August of this year, Reddit had 50 million daily visitors, 100,000 active subreddits and 50 billion monthly views.
Reddit has tried to broaden its portfolio by buying Dubsmash to expand into the fast growing video app market, moving into international markets and placing other bets.
The scale of growth Reddit has achieved is astonishing. According to a Pew Research Center survey, 18% of Americans use Reddit, with a quarter of Americans who earn more than $75,000 reporting that they use it. As we wait for the S-1 registration document, we have to ask how big Reddit has to get to attain minimum viable economies of scale and the accompanying profitability, or if Reddit can ever become profitable.