Reddit, the community-oriented message board site, filed to go public on Thursday, paving the way for it to become the first major social media company to go public in years and a test for private companies after a dry spell in initial public offerings.
In an offering prospectus, Reddit disclosed its financial performance in preparation for selling shares to investors. The San Francisco-based company reported its revenue rose more than 20 percent as losses narrowed last year. It added that it has 73 million daily users and more than 100,000 active communities.
The prospectus kicks off an initial public offering in which the 18-year-old company plans to meet potential investors to entice them to buy its shares. Reddit could go public on the New York Stock Exchange in a few weeks under the ticker symbol RDDT. Reddit’s bankers are seeking a valuation of at least $5 billion in the IPO, according to two people familiar with the matter. That’s about half of the $10 billion valuation the company achieved in a private funding round in 2021. Discussions are ongoing and the price could still rise or fall in the coming weeks.
Reddit is the latest in a previous generation of social media companies to seek an IPO, following Facebook’s high-profile offering in 2012, Twitter’s in 2013 and Snap’s in 2017. In the years since, the social media industry has changed and is under scrutiny for misinformation, hate speech and other impacts. Some of the companies have changed direction; Facebook was renamed Meta and Twitter was bought by Elon Musk, who took the company private in 2022 and renamed it X.
Reddit’s move is highly anticipated even after a lull in IPOs. Only 108 companies went public in the U.S. last year, about a quarter of the number that went public in 2021, according to data compiled by Renaissance Capital. The biggest tech deals last year included Arm, a chip designer, and Instacart, a grocery delivery company.
“We are going public to advance our mission and become a stronger company,” Reddit CEO Steve Huffman said in a founder’s letter included in the prospectus. “We hope the IPO will also bring significant benefits to our community. Our users have a deep sense of ownership over the communities they create on Reddit.”
Mr. Huffman added that the company wanted “that sense of ownership to be reflected in real ownership – so that our users are our owners” and that “converting to a publicly traded company enables this.” Reddit said it would reserve a portion of its shares at the IPO price for 75,000 of the company’s most productive users if they wanted to buy them.
In its prospectus, Reddit said its 2023 revenue was $804 million, up about 21 percent from $666 million the previous year. According to the prospectus, the company lost $90 million in 2023, compared to a loss of $158 million the year before.
The largest shareholders include Advance Magazine Publishers, Tencent Cloud Europe, Vy Capital, Fidelity Management and Sam Altman, a former Reddit board member and CEO of OpenAI.
Reddit’s road to public markets has been long and winding. Founded in 2005 by Mr. Huffman and Alexis Ohanian in a University of Virginia dorm room, the site was initially a destination for anonymous users to come together and discuss everything from popular television shows to guitars, makeup and pressure washers.
The site was unique in that it focused largely on close-knit, largely anonymous communities, all moderated by volunteers who self-managed their forums or “subreddits” based on rules they created themselves. It became known for “AMAs,” also known as “Ask me anything” sessions, sometimes featuring public figures such as former President Barack Obama, Microsoft’s Bill Gates and actor Nicolas Cage.
The company has raised hundreds of millions of dollars in funding over the years, including $250 million and more than $410 million in two funding rounds in 2021. Investors include Fidelity Investments, Andreessen Horowitz, Sequoia Capital and Tencent Holdings. Like other early social networking efforts, Reddit initially refrained from offering advertising and making money. Instead, it focused on revenue streams that came from community ideas, such as a user-generated e-commerce system and awards that users could purchase from each other. These ideas are still in play.
Reddit eventually introduced advertising based on its topic-oriented communities. For example, brands like Laneige targeted ads on a forum called Makeup Addiction, one of the most active subreddits where users discuss cosmetics and their use.
The site has also built a budding data licensing business based on its vast corpus of conversational data, which is becoming increasingly important given the craze for artificial intelligence. AI models are trained based on such data so that they can become more powerful. On Thursday, Reddit announced a licensing deal with Google, which has used Reddit data to train and build its AI systems.
“We expect that our data advantage and intellectual property will continue to be a key element in shaping future AI models,” Huffman said in the letter. The company has a number of undisclosed licensing agreements to use its data and expects to earn more than $203 million from those contracts over the next three years, the filing said.
The website had some problems. There was controversy after controversy over his refusal to moderate communities in his early years, including his role in spreading misinformation during the Boston Marathon bombing in 2013 and providing racist and misogynistic content in some of his smaller subreddits. Last year, Reddit experienced a user revolt after changing some of its rules and blocking third-party developers from using the site’s content for free.
Reddit has changed its stance on moderation and updated and more strictly enforced its policies in recent years, making it more attractive for marketers to place advertisements throughout the site.
The company also had a rotation of executives in its first decade and was led by four managing directors before Mr. Huffman returned to lead the site in 2015.
Reddit warned potential investors that as a publicly traded company it faces challenges and potential risks, including the emergence of large language models, the underlying AI systems that could potentially aggregate and synthesize the site’s content and allow users to view Reddit, without visiting the website or seeing advertisements.
The company may also struggle to woo brands in a digital advertising market dominated by Meta and Google.
“Given the gap between its platform’s capabilities and the best-in-class, Reddit could face a daunting challenge growing its advertising business,” said Eric Seufert, an independent mobile analyst who closely tracks social media companies and advertising.
The company also warned that it relies heavily on its community to moderate the platform and that future uprisings or departures could harm the site.
“We have a lot of opportunities and a lot to do,” Mr. Huffman said.
Lauren Hirsch contributed reporting from New York.
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2024-02-23 13:59:57
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