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Hipster internet favorite Reddit may have to lose its edge to go public

It's currently valued at almost $2 billion, but Reddit's offbeat, quirky feel might be an impediment to a successful IPO.
Image: FILE: Serena Williams Engaged To Alexis Ohanian
Tennis player Serena Williams and Reddit co-founder Alexis Ohanian are engaged. NEW YORK, NY - MAY 06: Co-Founder and Executive Chair of Reddit, and Partner at Y Combinator, Alexis Ohanian speaks onstage during TechCrunch Disrupt NY 2015 - Day 3 at The Manhattan Center on May 6, 2015 in New York City.Noam Galai / Getty Images

Questions about the social news aggregation site Reddit going public have been swirling for years — but the move seems more definite than ever, after CEO Steve Huffman saidit could happen by 2020. Now the questions is: What does the company need to do to get IPO-ready?

Reddit, which declined to comment to NBC News, is clearly prized by some major investors. It scooped up $200 million earlier this year, reaching a valuation of $1.8 billion, and is beloved by users: Analytics service Alexa rated it as the eighth-most popular site in the world. Plus, it’s shown it can stand the test of time, at least by internet standards, having been around since 2005. But the bare bones site has always been a bit of an outlier, and it’s been a hotbed for controversies (like the 2014 celebrity photo hack, six months after which Reddit enforced its photo sharing guidelines).

The 'front page of the internet'

The site's user-driven, niche feel is exactly what makes Reddit so appealing to so many people. It’s been slow to roll out a mobile strategy and still fosters an old-school, text-based vibe you may have recognized from 2005, which makes it feel almost like the secret basement of the world wide web.

“The culture of the site, even as they have scaled their user base, remains offbeat, quirky, and anti-establishment,” said Daniel Gulati, a partner at Comcast Ventures. “It's almost entirely user controlled, including on the user acquisition front. Anyone can start a subreddit and build their own community. To date there has been very little company-driven moderation of content (in contrast to what's happening over at Facebook now).”

Community first, money later

Reddit has a couple of key methods of monetization including Reddit Gold, a subscription service to allow users special access. It also has sponsored posts. But Brad Hines, a startup adviser, investor, and personal finance writer, opines that Reddit hasn’t wanted to risk losing its “cool factor,” and as such has remained “focused on continuing to stoke brand loyalty, and roll out methods of revenue slowly.”

“Reddit’s monetization is still well below where it would be needed to achieve a spectacular IPO," which is what would be expected of one of the most popular sites in the world, Richard Beale of Mindshare North America told NBC News. “As this improves with their new ad products and redesign, you can expect the conversations around an IPO to become more serious.”

A crucial pain point around monetization, as Greg Portell, lead partner in the consumer and retail practice of A.T. Kearney, sees it, is in the community aspect. That may seem ridiculous in considering that Reddit is all about community, but it’s really more like a collection of very disparate communities. This presents a challenge for advertisers.

“How can Reddit create stickiness among their users, when everyone has a different view?” asks Portell. “You and I may overlap on 20 percent of our content, but 80 percent is going in different directions. It's just not a very developed revenue model. Honestly, I just don’t think they have tried to monetize their audience to the greatest extent.”

Safe for free thinkers — but what about shareholders?

“Reddit can count big numbers in users — but that doesn't mean it's conducive to brand advertisers, which is generally a key monetization metric,” Chris Cunningham, CRO at Unacast and founder of C2 Ventures, told NBC News. “In addition, advertisers like safe and predictable content and Reddit is not that, which puts its ad business at risk.”

Would Reddit have to part with its user loyalty in order to please its shareholders? If so, that would pretty much defeat the whole venture of going public.

“If Reddit goes public, will its growth stop?” said David Mawhinney, associate teaching professor of entrepreneurship at Carnegie Mellon's Tepper School of Business. “It’s a worthy debate, but it’s not fair to frame it as an either/or situation. As long as Reddit has a quality product, it will keep growing. And that [$200 million in] funding probably wouldn't have come in if they weren't expected to keep growing.”

There’s also the idea that seasoned investors are often looking to diversify their portfolio with younger companies. Reddit stock could be the perfect opportunity.

“After a while, investors tire of investing in Apple or Netflix or Amazon because they fear their best growth days are behind,” said Mark Hamrick, senior economic analyst at “They’re asking, ‘What will the next growth story be?’ That's where a company like Reddit could come into play. And plenty of [shareholders] want to get into the ground level of a good story.”

But still, Reddit will have to make some concessions — or at least, more modifications.

“Implementing greater brand safety controls for users and brands alike whilst accelerating their shift to mobile-first would be two key initiatives for Reddit pre-IPO to mitigate the risk of undesirable headlines and subsequently shareholder shakes,” said Beale.

Reddit’s goldmine of data

Reddit may not have the strongest monetization game (yet), nor the slickest, cleanest platform, and it may be all over the place with its users in a way that seems to counter the cohesiveness that advertisers desire when targeting consumers. But Reddit also has a very precious ball in its court: data. So much data.

“What Reddit can do to really differentiate themselves is figure out what unique elements of people’s behavior they identify from their datasets that other competitors can't,” said Portell. “That's really the cornerstone to getting them out of selling eyeballs. Digital advertising is very simple and there’s no scarcity of it, but if Reddit can say to brands ‘We can show you this type of person in this phase of the purchasing funnel and make them more likely to convert,’ then that becomes something differentiating. Facebook and Google are pretty close to doing this, so Reddit needs to come up with something unique.”

Something’s gotta happen

It’s true that Reddit could still bail on an IPO, especially if there’s a bad turn in the stock market. It could even sell to a bigger company, though that seems unlikely. Or perhaps it could simply decide against dealing with all the invasive pressures of going public.

“You could generate income until the cows come home as a private company and not be bothered by the regularity and exposure that comes with being public,” said Professor David Brophy, director of the University of Michigan’s Center for Venture Capital and Private Equity. “That's the biggest argument for staying private.”

It’s not a bad argument. Alas, it’s not so simple. Though currently private, Reddit has a lot of investors counting on it — and watching the company like hawks. Some kind of liquidity move may be necessary in the near future.

“All these people have put something in and at some point Reddit has to return on that investment,” said Portell. “The most certain way to get that ROI is with an IPO.”

However, Reddit doesn’t want to end up like Zynga, the video game developer that went prancing to its IPO only to get candy-crushed.

“Zynga was a shooting star, went public, then its growth rate stopped because it didn't have the next hit game,” said Mawhinney. “It’s not that the company will die, but it can be crippling in that they can't ever get their mojo back. People are asking whether Snapchat can rebound. Even Twitter struggled, though to a lesser degree. Reddit has teams both internally and externally asking, ‘How do we avoid that?’”

Sounds like we’ve got a few years to find out — and in the meantime, we’re sure to see plenty of innovations come Reddit’s way. Hopefully, its devout users, aka redditors, won’t take offense — or if they do, they won’t stay away for long.

“When Facebook introduced its News Feed everyone hated it, so without a doubt whatever [Reddit does], a segment of users will be upset,” said Gulati. “News Feed was [detested at first], but now no user can imagine Facebook without it, and it added great utility to the experience.”