What’s hot on Reddit right now? Forget 40-year-old pictures of a bearded Nicolas Cage, the latest dump on Donald Trump, or r/mildlyinfuriating with a post from a Redditor impatient to let the world know that “[her] husband said he stopped pissing off the deck at night.”
On Thursday, Reddit goes public, offering 22 million shares to the public at $31 to $34 each. It aims to raise about $700 million, giving the company a market cap of about $5.4 billion — a little more than half of what it was valued at in 2021, when it first plotted an IPO. That may not sound like much for a company that bills itself as “the front page of the Internet,” but still, it may be an awful lot for a website that’s little more than an open forum for rabbit-hole dives into the nuances of Bitcoin, how to clean a charcoal grill, or why so many users just can’t get a date.
Co-founders Steve Huffman and Alexis Ohanian, roommates at the University of Virginia who were first grubstaked by the Y Combinator startup incubator, have grown Reddit from a tiny startup that in 2005 was goosing its page views with fake accounts, into the world’s seventh-largest social media platform. With more than 73 million unique visitors a day, and a series of successful venture funding rounds under its belt, Reddit’s existing owners, led by magazine publisher Conde Nast (a 35 percent stakeholder) to take it public.
The challenge is that Reddit hasn’t made a dime in profit in two decades, even as its valuation soared to a high three years ago of $10 billion. The promise of so-far elusive profits always appears to be just around the bend.
Another challenge is that monetizing Reddit’s customer base may not be easy. There’s little to spend money on on the site, and the fact that most users post anonymously makes demographic information — which drives up ad prices — almost non-existent. Reddit says it will boost its ad revenue by mining posts for context-driven ads, but even after a 21 percent rise in revenue last year, to $804 million, it still lost $91 million. That comes as Meta has generated billions in profits.
And one lucrative corner of the internet, porn, which may make up as much as a quarter of Reddit’s posts, is already dominated by other paywalled revenue sharing sites, such as OnlyFriends. Not only that, but Reddit’s ongoing effort to mine the site’s more than 1 billion posts to train artificial intelligence, has earned it an investigation by the Federal Trade Commission.
To boost the chances of a successful fundraise, Reddit has made a savvy move to appeal to its biggest fans, and those who may be the least concerned, or the least knowledgeable, about its financial prospects: the 100,000 or so Redditors who moderate the Reddits, the threads and discussion groups that make up the site. Nearly all are volunteers prompted by a love or obsession with their topic, and the company has reserved 8% of the shares for moderators and other insiders. The result: According to Reuters, the IPO is oversubscribed five-fold.
Back in the Golden Era of the internet, when Facebook went public in 2012 at a little over $38, fortunes were made as the internet exploded and social media reaped the profits. At close to $500 a share this week, Facebook — now technically Meta — is one of the great success stories of the stock market.
But even if Reddit’s IPO is successful, will Redditors and other investors make money.
A booming stock market — the Nasdaq is up nearly 40 percent in the past year — suggests this is a good time for companies to go public and cash in on investors’ appetite for new stocks. That could open a lucrative market in stock flipping, with fans shelling out more than the IPO price to own a piece of their favorite timesuck. Curiously, Morgan Stanley, JPMorgan and Goldman Sachs have all agreed to underwrite the IPO, agreeing in advance to buy a large chunk of the IPO for themselves or their clients, an indication that there may be an upside, especially for the most sophisticated investors.
One Caveat
Reddit has three classes of shares: Class A stock, the subject of the IPO, has one vote per share; Class B stock, reserved for company insiders, has 10 votes per share; Class C stock, none of which has been issued yet, would have no votes per share. That means the insiders control the company, and according to the prospectus, the Class B shareholders will have 97 percent of the voting power.
Of the 22 million shares offered, 15.3 million are coming from the company, which aims to plow proceeds back into operations, taxes, executive compensation and, oh yes, investment in Reddit. The remaining 6.7 million shares in the IPO will come from existing shareholders.
So who’s gonna get rich?
Steve Huffman, Reddit’s co-founder and CEO, will sell 500,000 shares, netting $17 million if the IPO prices at $34. He’ll hold on to a stake worth up to $141.6 million.
Jennifer Wong, Reddit’s COO, will sell 514,000 shares for up to $17.47 million, and hold on to $55 million in shares.
CFO Andrew Vollero is offering 76,494 Class A shares for $26 million, and holding on to shares worth $7.8 million.
But a group of top investors aren’t planning on selling their shares in the IPO. They include:
Sam Altman, CEO of OpenAI, who will have 9.1% voting power with shares worth up to $413.4 million.
Advance Magazine Publishers, who publish Vogue and were an early investor, will own 33.5 percent of Reddit, worth $1.4 billion.
Fidelity Management & Research, with a 9.3% voting interest will hold a $399 million stake.
Chinese tech firm Tencent, which reportedly invested $150 million in 2021, will have 9.4% voting power and shared worth of $525.2 million.
