Reddit is testing the IPO market during a treacherous time for unprofitable startups

Social media company Reddit has been toying with the idea of going public for half a decade. Now it’s finally going through with those plans—and the timing is risky.

The IPO market has effectively been at a standstill for the past two years, after public investors began to shy away from unprofitable businesses, and shares of public companies fell to earth after the pandemic-induced tech boom in 2020 and 2021.

Some companies that have tested the waters in the past few months have struggled to maintain traction. Instacart, for example, closed at less than $30 per share on Thursday, down 11% from its public debut in September.

Now Reddit is delving into the noise—and it could face even more trouble than some of its peers before it because of one key line item in its financials: It’s not profitable. Reddit, which revealed a net loss of $90.8 million in its IPO filing on Thursday, is more akin to the swaths of high-growth, money-losing companies that went public two years ago. It has cumulatively lost more than $716 million since 2014, and has yet to post a net profit, filings show. Revenue at Reddit is climbing—up to $804 million in 2023 from $666.7 million the year prior. But losses are a tough sell for public investors these days.

“They’re losing a good amount of money,” says Greg Martin, managing director of Rainmaker Securities, a secondaries brokerage where investors can buy shares of private companies before they go public. “Sophisticated investors won’t be excited about buying,” he wrote in an email.

Only 128 companies went public in 2023, and 90 in 2022—versus 416 in 2021, according to EY. While there were a handful of well-known companies, including Mediterranean food chain Cava and grocery startup Instacart, that went public in the past two years, most of the highest-valued startups sat on the sidelines given the wide gap in valuations on the public markets versus the private ones.

While Reddit has never posted a profit, it has undergone some cost-cutting and has managed to reduce its losses in recent years. Reddit’s net loss in 2023—$90.8 million—was well below the $158.6 million it lost in 2022. However, the company said in its filings that it expects its “expenses to increase in future periods” as it keeps investing back into growing its user base, hiring employees, developing new products, and promoting its brand.

It doesn’t help that Reddit makes nearly all its revenue—approximately 98%—from advertising, a revenue stream whose growth has been slowing recently as many companies trim expenses. Reddit said in its IPO filing that about a quarter of its advertising revenue came from just 10 of its customers, none of which have long-term contracts. Reddit lists this—as well as the incredibly competitive advertising environment—as a notable risk to its business in its financial filings.

“Some of our larger competitors have substantially broader product or service offerings and leverage their relationships based on other products or services, as well as collect more personal data than we do, to gain additional share of advertising budgets,” Reddit disclosed in its filings.

Reddit had confidentially filed to go public in December 2021, though those plans never came to fruition when the market retreated in 2022. A Reddit spokesperson declined to comment for this story.

Reddit’s last formal valuation was $10 billion in summer 2021, during the height of the boom in private markets. But it’s unlikely Reddit is worth anything close to that today, as valuations have sunk across the industry in both the public and private markets. The lead investor of Reddit’s latest funding round, Fidelity, marked down its shares of Reddit last year, reflecting an updated valuation of $5.5 billion. Shares of the company have been trading on the secondary market at a valuation of approximately $4.8 billion, according to both Rainmaker and another secondaries brokerage, Forge Global.

Even if Reddit isn’t worth what it was two years ago, early investors, however, will still make out quite nicely from an IPO. OpenAI CEO Sam Altman, or entities affiliated with him, hold approximately 8.7% of Reddit, while Tencent owns about 11%, according to filings.

Reddit’s public debut may end up either a warm welcome to other tech startups that the IPO market has reawakened—or a dire warning to other unprofitable companies that it might be a better idea to sit tight.