On October 30, 2024, Reddit, Inc. released its financial results for Q3 2024, marking its first profitable quarter in history. The milestone coincides with Reddit’s 20th anniversary. How did the company sustain itself for two decades, why is it profitable now, and could this be linked to tax optimization? Vladyslav Khilkovets, Head of Strategy and Operations at Spalah, dives into the details.
UGC and Profitability: How Reddit Grew Through Its Users
Reddit followed the well-trodden path of Facebook and Twitter: harness the network effect by letting users generate content for free and monetize it via advertising.
The platform operates as a social news aggregator and web forum. Registered users (known as "Redditors") share a variety of content—text posts, images, videos, etc. Posts are organized into topic-based boards called “communities” or “subreddits.” Other users can vote posts up or down. As of October 2024, according to Similarweb, Reddit ranks ninth among the world’s most-visited websites.
Reddit maximizes the use of user-generated content (UGC). Users post content, moderate subreddits, and do all of this without pay. This approach significantly reduces operating costs and does not limit the number of communities.
How It All Began
Reddit was founded in 2005 by three University of Virginia students: Steve Huffman, Alexis Ohanian, and Aaron Swartz. The company secured its first external investments a year later.
The business grew steadily, repeatedly securing funding rounds. In 2014, backed by the so-called "PayPal Mafia," Reddit raised $50 million, with a valuation of $500 million. This funding round was led by tech visionary Sam Altman, who also briefly served as Reddit's CEO for eight days that year. Perhaps this short tenure drove Reddit’s success (just kidding).
IPO and a New Era Refor ddit
Before its IPO, Reddit completed nine funding rounds, raising $1.3 billion from 49 investors.
The IPO occurred on March 22, 2024, and was deemed successful. Initially priced at $34 per share, Reddit’s stock surged to $65 within days—70% higher than anticipated. Shareholders and investors raised around $750 million, valuing the company at $6.4 billion. Considering the challenging investment climate of 2022–2023, this was a notable success for the social media platform.
Were Investors Happy?
Advance Publications, which acquired Reddit in 2006—just 18 months after its launch—secured the highest ROI after the IPO. Other major shareholders included China’s Tencent, Fidelity Investments, and Sam Altman. Compared to Pinterest and Twitter, Reddit’s valuation was lower due to its unprofitability at the time.
A Period of Growth ("+")
The next question is why the company’s shareholders were content with Reddit’s unprofitability for two decades. The answer lies in the theory of economic cycles and market dynamics. Over the past 20 years, despite several crashes, the global tech sector has experienced significant growth, reflected in the rising value of tech companies’ shares.
According to the NASDAQ 100 Technology Index (NDXT), which tracks the largest 100 tech firms since 2007, the sector grew tenfold during this period.
However, the index's sharp decline of 41% in 2022–2023 provides clues about shifting market conditions.
Chart of NASDAQ 100 technology company stocks (Source: Yahoo Finance).
The COVID-19 pandemic triggered a boom in tech companies. Lockdowns pushed people online, increasing internet activity and driving online business growth.
COVID Boom and the "−" Period
Thus, the shareholders' plan was relatively straightforward: invest in the company’s growth and monetize this value through a successful IPO. When the company initially filed for an IPO in 2021, its valuation stood at $10 billion—$3.6 billion higher than its valuation in 2024. However, events in 2022 significantly impacted Reddit's IPO plans.
Russia's full-scale invasion of Ukraine disrupted established corporate strategies. Budgets and plans shifted, and global sanctions strained the global economy. Rising energy prices, increasing polarization, and the breakdown of trade relations slowed economic growth and drove interest rates. The investment world frozen in anticipation for a recession: the number of financial deals and IPOs dropped significantly, and the overall value of transactions began to decline.
Global M&A Deal Value from 1985 to 2024
In absolute terms, the deals of 2021 reached a record-high aggregate value of $5.2 trillion—the highest in history. By 2022, the total deal value dropped by 36.5% to $3.3 trillion; in 2023, it declined further to $2.5 trillion. Over two years, the M&A market has fallen by more than half.
Starting in March 2022, the Federal Reserve began raising the base interest rate to control inflation. This shift significantly affected the investment market. Investor sentiment changed from greed to fear, leading to increased demand for conservative financial instruments. This was logical—when bank deposits could yield 5–6% annually in dollars, taking on higher risks to invest in startups and scale-ups became less rational from a risk-reward perspective.
In March 2022, the Federal Reserve began raising interest rates to curb inflation, shifting investor sentiment from greed to caution. Conservative financial instruments gained appeal, making high-risk investments in startups less attractive.
Profitability in 20 Years: What Led Reddit to Success
Under such conditions, Reddit entered the market for two main reasons: the company urgently needed funds, and there was a goal to achieve profitability. As we can now see, the company addressed both issues, demonstrating solid trading results and achieving profitability by the end of the third quarter.
Looking at the company's P&L statement, we can see that its financial performance is quite impressive.
Reddit Inc. income statement in kUSD (Source: Yahoo Finance)
Thanks to its business model based on network effects and UGC (User-Generated Content), Reddit maintains a very high gross margin—averaging 80% in recent years. In 2023, the company spent $230 million on sales and marketing and $438 million on R&D. These figures suggest that management focused on business growth rather than immediate profitability. The company achieved its goals: by the end of Q3 2024, its DAU (Daily Active Users) count had grown to 97 million, a 47% increase compared to the same period the previous year. This was achieved by integrating AI to translate posts into French, Spanish, German, Portuguese, and Italian.
Reddit implemented a successful strategy by heavily investing in user growth, ultimately satisfying investors by demonstrating profitability. Its journey is an interesting example of business development, uncommon in the Ukrainian market. Currently, operational profit is the "new gold" in the Ukrainian startup scene, with every company striving for high EBITDA rather than rapid growth in metrics.
This summary uses insights from The Verge, Business Insider, and High Bar Journal
Author: Vladyslav Khilkovets, Head of Strategy and Operations at Spalah
