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Reddit is going public with a time-tested business model pioneered by the likes of Facebook and Twitter: Get people to give you content, for free, and sell ads on that content.
So why is it losing so much money?
Last year, according to Reddit's newly filed IPO documents, the company generated $804 million in revenue and lost nearly $91 million. That's better than the year before, when it lost $159 million on on revenue of $667 million.
But it's still a lot of money to lose selling a free product. Right?
It's not unusual for tech companies to lose money as they're going public. And when they do, the rationale is usually that these are young, fast-growing businesses, and investors are getting a chance to get in early.
But Reddit is no baby: It started nearly two decades ago, in 2005. Condé Nast, the magazine giant, bought it in 2006 and spun it out as a stand-alone company in 2011.
Reddit kind of anticipates this critique in its investor docs, and argues that it didn't really start operating as a serious business until 2018 when it finally started "meaningful monetization efforts" — that is, trying to make money for real.
But that's still six years ago. What has Reddit been doing since then?
One big, obvious answer: It has been hiring a lot of engineers and spending a lot of money on their salaries.
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Last year, Reddit's spending on research and development — which it says is money spent primarily on "engineers and other employees engaged in the research, design, and development of new and existing products" — totaled $439 million, an eye-popping 55% of its revenue. (Note: There are some dumb stories floating out there about Reddit CEO Steve Huffman getting paid $193 million last year. You can ignore those in general since they are really about stock and options awards with a long vesting period. And you can specifically ignore them for this story since those costs aren't included in the R&D totals.)
By comparison: When Facebook went public in 2012, R&D was 10% of its revenue. Last year, when it was building things like virtual reality goggles, that number had bumped up to 29%.
When Twitter went public in 2013, R&D was 44% of revenue. And at the end of 2021, the last year it filed a public statement before Elon Musk bought the company, that number was down to 25%. Bear in mind this was a company that both Musk and Twitter management thought was overstaffed.
Those numbers puzzle me. Reddit works great for the people who love it, and there are a lot of them. But one of the reasons it works great is that it's a pretty bare-bones product that does what it's supposed to: It lets people post something they're interested in and then lets other people comment about it. That's it. That's the whole thing.
What am I missing? I asked Reddit comms for comment but they declined, citing the company's quiet period before the IPO.
The best argument I can make in their defense is that Reddit is still adding a lot of users and that more users equals more ad money. (Of note: The Verge's Alex Heath argues that a lot of Reddit's recent growth has come from a surge of Google traffic. And as any digital media company can tell you — traffic surges from platforms can also get shut off, very quickly.)
Plus there's more money coming from the AI-training data deal it did with Google (Hey! Google again!). And that money is basically cost-free, so that's going to make the margins look better, too.
Is that enough to make investors comfortable with a theoretical $5 billion valuation? Am I missing something? Feel free to email me and let me know.
