Reddit, the popular online platform for sharing content, is going public and has reported a significant loss of nearly $91 million in its IPO documents. This raises the question: why is Reddit losing so much money? The answer lies in its spending, particularly on research and development (R&D).
Reddit operates on a business model similar to that of Facebook and Twitter, where users provide content for free, and the company sells ads on that content. Despite generating $804 million in revenue last year, Reddit still incurred a substantial loss. This may seem surprising, considering the success of its revenue-generating strategy.
Tech companies often experience losses when going public, as they are typically young and fast-growing businesses. Investors see this as an opportunity to get in early. However, Reddit is not a new player in the game. It was founded in 2005, acquired by Condé Nast in 2006, and became an independent company in 2011. In its investor documents, Reddit acknowledges this critique and argues that it only began serious monetization efforts in 2018.
So, what has Reddit been doing all these years? One significant factor contributing to its losses is the company’s investment in hiring engineers and other employees involved in research and development. In 2023, Reddit spent a staggering $439 million on R&D, which accounted for 55% of its revenue. This is a significantly higher percentage compared to other tech giants like Facebook and Twitter when they went public.
Facebook allocated 10% of its revenue to R&D during its IPO in 2012, while Twitter allocated 44% in 2013. By the end of 2021, Twitter’s R&D spending had decreased to 25%. These numbers raise questions about Reddit’s high R&D expenditure, especially considering that its platform is relatively simple compared to others. Reddit’s core functionality allows users to post content and engage in discussions.
Despite the puzzling numbers, Reddit continues to attract a growing user base, which could translate into increased ad revenue. However, it’s worth noting that a significant portion of Reddit’s recent growth has come from Google traffic, which can be unpredictable and subject to sudden changes. Additionally, Reddit has entered an AI-training data deal with Google, which brings in additional revenue at minimal cost.
The question remains: will these factors be enough to convince investors of Reddit’s $5 billion valuation? The company’s IPO will undoubtedly shed more light on its financial prospects. As of now, the reasons behind Reddit’s substantial losses remain a topic of speculation.
