On Thursday, Reddit (Plexo Capital portfolio company) will enter the public markets via an IPO and watched very closely by individual investors, institutional investors (both public and private), venture capitalists and CEOs of private (venture backed) tech companies. The journey for Reddit to the public market has been a long road, which in many ways is emblematic of the potential opening of the IPO window. Since the height of the IPO window in 2021 when 1,035 companies went public in the US, only 335 companies went public in 2022 + 2023 combined. So far this year, there have been only 33 IPOs.
IPOs are critical for the venture capital (VC) ecosystem as they provide liquidity to the VCs. That liquidity is also beneficial to the institutions who invest into VC funds (known as limited partners or LPs). These LPs will often reinvest proceeds received back into other venture capital funds. Therefore, IPOS not only provide a return on investment but also free up cash for more VC investments.
Reddit will be watched closely for many reasons; however, there are two important factors many will track: 1/ the company’s stock performance (both at IPO and longer term) + 2/ the company’s financial performance. Obviously, the two are related, but the most recent information is available in the S-1 filing for the company’s performance, so we will see how investors react to it at the IPO.
Looking at the numbers, Reddit closed 2023 with $804M in revenue, which is a 21% increase over 2022. Reddit’s primary source of revenue is advertising and monetized its users at an average revenue of $12.31 in 2023 (average revenue per active user or ARPU). However, Reddit is not yet profitable and lost $90.8M in 2023. For comparison, Snap’s revenue for 2023 was $4,606M with an ARPU of $11.49 (please see the comments for a chart of comparable companies in the social media space).
Reddit is expected to price between $5B and $6.5B. If the IPO is priced at the high end of the range, then the revenue multiple would be 8.1. The revenue multiple of Snap is 4.0 while Meta comes in at 9.4. It is important to note that the last valuation of Reddit in the private markets was ~$10B, so even at the high end of the range, the valuation is off 35%. Pinterest was the last social media company to go public, which happened in 2019. Pinterest went public at a valuation of $10B which was down from its last private market valuation of $12B (17% decline). At the end of 2018, Pinterest had revenue of $756M, so the revenue multiple was 13.2, and a loss of $63M at that time.
A successful Reddit IPO alone will not open the IPO window. There are many highly anticipated companies in the IPO pipeline (e.g., Stripe, Databricks + Turo to name a few), and we need to see solid performance from many companies to return to normalcy (or a new normal). That said, if Reddit stumbles, that will likely induce more damage to the IPO market than a successful IPO will provide support.
#reddit #ipo #VC