Reddit

More than 5.3 billion people were using the Internet as of Q4 2023, which amounts to about 65.7% of the global population. Meanwhile, 76% of internet users were engaged with some kind of online community as of 2019, a percentage that showed a steady increase in preceding years. A similar rate of online community membership implies at least 3 billion online community members around the world in 2023.

The proliferation of social media platforms has allowed anyone from around the world to interact with one another based on shared communities or interests. However, as social media usage grew, user habits evolved. Users are starting to look for alternatives to broad-based platforms, like Facebook and Instagram, and many are moving towards more niche platforms driven by interests, like TikTok, where they can find deeper connections in like-minded communities. Many of those like-minded communities are choosing to congregate on Reddit.

Once touted as the “front page of the Internet,” Reddit is a social news aggregator and discussion platform that describes itself as a “community of communities.” Reddit grew into a network of communities for people to discuss a wide range of interests, from recent news headlines (r/news) to new scientific research (r/science) to niche threads (r/MemeEconomy). These network categories, referred to as ‘subreddits,’ allow users to join a community of people with a shared interest in the topic. As Reddit put it in its February 2024 S-1 filing:

Reddit was founded in 2005 when Steve Huffman (CEO) and Alexis Ohanian Sr. (former executive chair) met as roommates at the University of Virginia. The two were iterating on startup ideas when they met Paul Graham at a lecture. Graham subsequently invited them to apply to his startup incubator, Y Combinator. While their initial startup idea (SMS for food delivery) turned out to be unviable at the time, they eventually landed on a second idea that stuck: Reddit (”Read It”). The idea came from a brainstorming session with Graham and earned them a spot in Y Combinator’s inaugural class.

A year after its launch, Reddit was acquired by Conde Nast in 2006 for $10 million. Huffman and Ohanian Sr. stayed with Reddit for three years as part of the sale contract and left the company in 2009. In the years after their departure, Reddit continued to grow its user base under new leadership; however, it also developed several fundamental issues that led to a crisis in July 2015, causing interim CEO Ellen Pao to announce she was leaving. Ohanian Sr. had rejoined the company a few months before this crisis as executive chairman, and Huffman rejoined the company as CEO after Pao’s departure.

Under the renewed leadership of the founders, the company grew from 164 million to 243 million MAUs within a year and also doubled its employee count. In addition, the company took steps to curb some of the user issues that were harming the user experience. Finally, the company made some key strategic hires. Chris Slowe (CTO), was Reddit’s first employee and returned to the company in January 2016. Roxy Young (CMO), hired in April 2017 spent 15+ years in consumer marketing at Netflix, Zynga, and Gap. Jen Wong (COO), hired in April 2018 has experience in digital and interactive media from Time, PopSugar, and AOL. Finally, Drew Vollero (CFO), hired in March 2021 joined from Snap, where he served as the company’s first CFO, leading it through IPO, before doing the same for Reddit in its March 2024 IPO.

Source: Contrary Research

Platform

Reddit’s core product is a platform for social news aggregation centered around communities of “Redditors” who want to share content about a specific topic. On average, about 1 million posts are added to Reddit each day. Users can create a community (”subreddits”) around a particular topic that interests them. Other users who find that topic interesting can join the community to contribute posts, comments, or upvotes.

Under each post (which can be either text, image, video, or a link to another site), users engage in discussion through comments that can be recursively nested within each other and organized into “threads.” Yishan Wang, a former Reddit CEO, pointed out:

Among qualities that set Reddit apart from other social platforms, like Facebook or Twitter, two of the most important are:

1. Anonymity/pseudonymity: Users are anonymous, or more accurately pseudonymous, by default, meaning real names, age, gender, and profile pictures are not required. Instead, users have usernames that protect their real-world identity. This enables them to speak with authenticity without fear of backlash, while it also emphasizes the content itself as opposed to the identity behind the post. In contrast, users on other social platforms often attach their real names to promote their personal brand. However, pseudonymity can create complex issues around content moderation and community management.

2. Transparency: Every post and comment has an upvote/downvote button clearly visible, and a counter that tracks the count of votes on a post, as voted by other Redditors. While most social platforms only track likes, obscuring negative reactions, Reddit tracks the true net sentiment on posts.

While the product has historically been driven by users organically searching for and creating groups around their interests, Reddit launched a Discover feature in February 2022 to better curate the user experience and expose users to communities they might enjoy. In the announcement of its Discover feature, Reddit described the product this way:

This is one of the many attempts social platforms are making to become more algorithmically driven, with the goal of helping users surface content they’re interested in. The rise in popularity of apps like TikTok has spurred this trend, and users see it as a way to let their data guide their content experience. Reddit has an existing corpus of both content and user data to start serving up more curated content.

In April 2023, Reddit announced an update to the product intended to bring a “refreshed look and feel” to the feeds. This included a simplified interface intended to make posts “easier to digest” and make it easier to find relevant posts. It also reduced spacing, introduced a “media inset” for images and videos, and a “greater emphasis on community” with greater visibility for post creators, awards, and Reddit domain attribution.

Advertising

Reddit monetizes through its advertising platform. Ads take the form of Reddit Posts nested within a subreddit's feed.

Reddit Ads offers five main campaign styles: brand awareness and impressions, traffic, conversion, video views, and app installs. Reddit’s advertiser base can be segmented into large brands vs. SMBs. Large brands have historically dominated Reddit’s ad sales. However, as of September 2021, it was reported that the company had to start to push to include more small businesses and midsized advertisers to unlock further value. In 2020, Reddit introduced an automated ad marketplace to make it easier for self-serve advertisers to bid on Reddit’s ad space. The long-tail segment is a key growth driver for ad revenue.

Reddit supports personalized ads and in September 2023 Reddit announced a change that would make it so that some users would no longer be able to opt out of personalized ads. Although this upset some users, Reddit’s head of privacy said that users wouldn’t see much of a change to their ads and that Reddit did not require much personal information from its users.

Customer

“Redditors” (Reddit users) exchange advice, ideas, information, and memes on the platform. In 2016, Pew conducted a survey which found that Reddit users were 67% male and 33% female, and were mostly young (64% of users were under the age of 29). In addition, 82% of Redditors were college-educated and 69% earned more than $30K in annual income.

According to Similarweb data from December 2023 to February 2024, 45% of Reddit’s site traffic comes from the United States, with the next biggest user base being in the UK (10%). Reddit’s user base overall heavily skews towards English-speaking or commonwealth countries, with the top five including Canada, Australia, and India. Data from this period showed a similar gender breakdown of users — 65% male and 35% female — while almost 67% of Reddit users were under the age of 34. Meanwhile, among advertisers, large companies make up the majority of Reddit’s customer base. As Reddit put it in its February 2024 S-1 filing:

Reddit’s emphasis on content over identity has allowed its social graph to form around interests rather than connections. The content-driven algorithm emphasizes community response to different posts, so the power users of Reddit are more often the “specialists” in a particular topic. Based on one analysis of subreddit interactivity, one quickly notices how siloed much of the engagement on Reddit is. Many users turn to Reddit looking for content relating to a specific topic area.

Prior to Reddit, community-based platforms had limited success forming high-engagement forums that consolidate both macro and niche topics. With Reddit, when someone wants to answer specific questions, like how to fix their car door or why a stock is trading down, Reddit is often one of the first places they go. It has become common practice to search Google for a term or question followed by “Reddit” to access more curated results.

Market Size

More than 5.3 billion people were using the Internet as of Q4 2023 (65.7% of the world’s population). This number continues to grow as internet adoption increases. Of this population, roughly 76% engage with an online community, equating to over 3 billion community members.

The global social media market was valued at $231.1 billion in 2023, having grown 19.4% from $193.5 billion in 2022, and is expected to reach $434.9 billion by 2027 (a 17.1% CAGR). Meanwhile, the social media advertising market is estimated to reach $250 billion by 2028. Reddit is primarily focused on social media advertising. However, it is well-positioned to leverage other industry tailwinds, including ecommerce platform adoption, social media management, and analytics.

In its S-1 filing, Reddit identified the three addressable markets it felt were most relevant to its business: advertising, data licensing, and what it termed “user economy.” Regarding advertising, which was its principal source of revenue at the time of its IPO, Reddit stated that:

Reddit also believes it can tap into the growth of generative AI by licensing its data to LLMs as a new source of revenue for the company, an opportunity that it estimated to be growing at a CAGR of 20% and that it expected to reach $1 trillion by 2027. Finally, the company believes it will be able to monetize the informal exchange of goods of digital goods, especially games. It estimated the size of such commerce to be $1.3 trillion at the time of the IPO and expected this to grow to $2.1 trillion by 2027, representing a 12% CAGR.

Reddit’s primary competition comes from Twitter, Facebook, TikTok, and Quora. 4chan is similar in terms of style (i.e. text-based posts). However, Reddit has significantly outgrown 4chan; 4chan had around 20 million monthly active users (MAUs) as of 2022, compared to Reddit’s 430 million by 2020, which had grown to roughly 850 million by 2023. User preferences continue to shift, indicating that the next 10 years of social networks will be unlikely to look like the last 10 years. In early 2022, Facebook’s global user count declined for the first time, showing some weakness in its continuous growth run. Facebook has also struggled to compete for the attention of younger users, many of whom are drawn to newer entrants like TikTok.

Source: Pew Research

Broad social platforms are becoming less relevant as some younger users opt instead for niche platforms built around like-minded communities and content. Reddit has already taken action to capitalize on these trends with product launches like its AI-driven Discover tab.

X (formerly Twitter)

X (formerly Twitter) was founded in 2006 and is a social networking platform that allows its users to send and read microblogs. It was taken private by Elon Musk for $44 billion in October 2022. X is the most comparable in terms of user base, speed of information, and content flow. It falls just behind Reddit in terms of user count at ~400 million MAUs as of early 2022.

The key difference between the X product and Reddit lies in the network structure. With X, users follow an individual in asymmetric follow relationships. With Reddit, users follow a community. For users trying to discover a topic like the NBA, they may need to follow multiple NBA personalities, journalists, and commentators on X versus simply following the r/nba subreddit which aggregates NBA news and commentary from numerous sources. However, on Reddit, communities are only valuable once they reach certain levels of user engagement, which is difficult to kickstart but self-sustaining once critical mass is achieved.

Meta

Meta was founded in 2004 as Facebook and is a social technology company that enables people to connect, find communities, and grow businesses. Meta’s market cap was $1.2 trillion as of March 2024. Meta has a powerful advertising business, with 3.7 billion monthly active users as of October 2022 across its social media applications including Facebook, Instagram, and WhatsApp. Of these, over 1.8 billion used a Facebook Group at least once a month as of September 2023. Within Facebook’s constellation of product offerings, Groups is Reddit's primary competition.

In July 2022, Facebook introduced an anonymous profile, allowing users to have multiple profiles under one account. Product changes like this may allow users to maintain a degree of anonymity or pseudonymity and more comfortably find their niche communities on Facebook. How many users will adopt that kind of functionality is unclear.

In terms of advertising, Facebook users can create rich user profiles based on personal information and data tracking, making targeted advertising easy. Reddit’s push for anonymity makes it more difficult to monetize users. For example. Reddit didn’t ask for a registered email until 2018. By tracking subreddit followings, Reddit can also synthesize user profiles without relying on 3rd party data. However, for Reddit’s ad revenue to reach the scale of Facebook, it will need to expand internationally and experiment with different content formats to deepen user engagement.

Quora

Quora was founded in 2009 and is a Q&A-based social platform. The company had previously raised an $85 million Series D in April 2017 which valued the company at $1.7 billion, led by Collaborative Fund and Y Combinator’s Continuity Fund. More recently, Quora raised an additional round from a16z in January 2024 that valued the company at ~$500 million. Like Reddit, Quora also covers a wide range of discussion topics in a more serious Q&A format. Responders highlight their work experience in bios to lend credibility to their answers, like a LinkedIn forum.

Reddit, on the other hand, caters to a more casual crowd hangout. If someone is Googling a question, they might review both Reddit and Quora. However, Quora is typically more deliberate question-and-answer seeking compared to Reddit’s more casual consumption Reddit’s key differentiation comes from its subreddits and the attached community. Information on Twitter and Quora is organized into a combined feed based on followers. Subreddits provide users with a “home” for specific topics.

TikTok

TikTok was founded in 2016 and is a platform for sharing short videos and social networking. In secondary markets by late 2023, TikTok’s parent company, ByteDance, was valued at $219 billion, making it the highest-valued private tech company as of March 2024. In November 2021, Reddit introduced a “TikTok-style” video feed in its mobile app, bringing it into more direct competition with ByteDance. This medium of scrollable, short-form video has also been introduced by other social media platforms, notably Instagram Reels and YouTube Shorts. In March 2024, the US House of Representatives passed a bill that, if passed, would force TikTok’s Chinese parent company Bytedance to either divest TikTok or face a ban, driven by national security concerns.

Users can join Reddit for free and access all subreddits, create posts, and engage with other people’s content. Reddit’s monetization comes through three primary channels: advertising, Reddit Premium, awards, and API usage. Of these, advertising is by far the most significant. Reddit stated in its February 2024 S-1 filing that “the core of our monetization is through advertising solutions based on user engagement” and that “we generate substantially all of our revenue from advertising.”

Reddit Ads

Advertising revenue comprises the greatest portion of Reddit’s revenues. Reddit sells ads in two major ways:

1. Managed service for large-scale advertisers. Advertisers using Reddit Ads are given access to a dedicated Reddit sales team, a full suite of tools, and best practices to navigate the platform. This service is reserved for advertisers with a quarterly spend of at least $50K.

2. An auction-based system. Advertisers bid using a cost-per-click (CPC) model. The highest bidding companies win better placement and advertisers set their daily and per-bid budgets.

When compared to other social platforms, Reddit advertising can be a relatively cheap option. Because the ad platform is newer than some competitors, its advertising ecosystem hasn’t become as saturated and is therefore less competitive. The click-through rate (CTR) isn’t as high, meaning advertisers can more affordably acquire impressions on Reddit at a lower cost.

This is typically due to the lower-quality targeting available on Reddit versus a platform like Instagram or Facebook, which collect more granular user data. Overall, Reddit’s ad platform is less competitive for advertisers, which makes it an opportunity for Reddit to expand as an ad spend category for different companies.

Reddit Premium

Source: Reddit

Reddit has a paid subscription which allows users to “support Reddit, get VIP treatment, exclusive access, and monthly coins.” Users have the option to pay $5.99 per month or $49.99 per year. With Premium, Redditors receive an ad-free experience, a personalized avatar (”snoovatar”), and access to r/lounge, an exclusive member-only subreddit.

Awards

Redditors can purchase and gift virtual goods, which originally began with “Reddit Gold”, which they can give to other users for their content and engagement. These awards can be used in the Reddit feed to highlight comments or posts on Reddit, and are bought with real money.

In July 2023, Reddit announced it would be overhauling its awards system in favor of a new system for rewarding content. It announced that Reddit Coins and the existing awards system would be deprecated in September 2023 and that Reddit Premium would discontinue the monthly coins and premium awards that it previously offered.

API

As of July 2023, Reddit began charging developers for access to its API. The company will charge $12K for 50 million API requests, a high price relative to many others in the space, although still lower than X’s $42K for 50 million requests. As more large language models crawl the web for content, more content generators like X and Reddit have decided to monetize their APIs. Reddit’s API will remain free for the following groups:

1. Developers who want to build apps and bots that help people use Reddit

2. Researchers who wish to study Reddit for strictly academic or noncommercial purposes

In 2014, one year before Ohanian and Huffman returned to take back the reins at Reddit, the company generated just $8.3 million in ad revenue. For reference, Facebook collected ~$12 billion in ad revenue that same year. Reddit has been running ads since 2009, but only in the years since 2018 has it started to build more robust functionality around its ad platform.

In that time, monetization has started to scale, but relatively slowly. Some estimates indicate that Reddit only grew revenue by ~20% in 2020. Reddit’s total revenue grew 38% in 2022 to about $670 million. In terms of users, Reddit reached an estimated 55.8 million daily active users (DAUs) as of 2023.

By the end of 2023, Reddit had grown its DAUs to 76 million, and the site had more than 500 million visitors in December 2023. Reddit also reached 1 billion cumulative posts and more than 100K active communities (i.e. subreddits) by the time of its March 2024 IPO, with 267 million weekly active users on average. It reported $666.7 million in revenue in 2022 at a gross margin of 84%, and this grew to $804 million at 76% gross margins by 2023, but it also reported net losses of $158.6 million in 2022 and $90.8 million in 2023.

Reddit went public in March 2024 under the ticker symbol “RDDT”, closing its first day of trading at a market cap of $9.5 billion. Its IPO allowed Reddit to raise $519 million in public funding to add to its prior private funding which totaled $1.3 billion. Prior to this IPO, in August 2021, Reddit raised a $410 million Series F which valued the company at $10 billion led by Fidelity. Its $804 million 2023 revenue implies a revenue multiple of approximately 12x at a $9.5 billion market cap.

Changing Social Media Usage

In 2020, one study found that 64% of Gen Z had taken some form of “break” from their social media usage and that 34% had “completely quit” social media. This indicates a level of user unhappiness with the negative side effects associated with social media use, including social media addiction and mental health issues.

Reddit’s content-focused, pseudonymous platform is less likely to experience user attrition in the same way as other social media. The opportunity for Reddit is to continue to lean into a community-centric approach and to become a place where people will still come to find niche information around their interests even as they avoid the more identity-driven social platforms. According to a Google Trends report from March 2024, Reddit has seen a steady increase in search interest in the previous five-year period within the United States relative to other social media platforms.

Source: Google Trends

International Expansion

Reddit has announced investments in growth campaigns in the UK, Canada, and other English-speaking countries. In 2021, Reddit also set up a presence in Australia, Canada, and Berlin. International expansion not only drives user growth but also bolsters ad revenues. Reddit has started launching translation services within Reddit to better bridge the language barrier in non-English speaking countries, which remained the largest source of Reddit traffic as of February 2024.

Text-based platforms like X have been able to bridge this language barrier, with Japanese users of X closely trailing its US user count as of March 2024. As of November 2022, Reddit lagged behind other social companies in MAUs, largely because the top 10 players have an established international user base. For example, nearly 50% of Reddit’s users were in the US as of May 2023 compared to ~8% of Facebook’s 2.9 billion users.

New Content Formats

Video and audio content surged in the 2010s and early 2020s across multiple social media platforms. Instagram popularized photo sharing, Snapchat popularized sharing stories, Twitch popularized streaming, and TikTok popularized short-form video content. Additionally, Spotify, Twitter, and Clubhouse capitalized on audio streaming content. The advertising spend associated with video advertising is higher than that of image advertising.

In 2019, Reddit launched the Reddit Public Access Network (”RPAN”), as a public network of streamed video content that Redditors can broadcast to the platform. Redditors are also able to award users for their content, thereby driving more revenue. In 2021, Reddit also announced Reddit Talk, a Clubhouse-like experience for subreddits.

Challenging Incumbent Advertising Platforms

The changes Apple made in 2021 to its user tracking cost Facebook’s advertising platform around $12 billion in sales in 2022 This opened an opportunity for other advertising players like Reddit to capture part of the incumbent market. Reddit’s communities, inherently built around specific subject matter interests, can help advertisers for SMBs or niche topics target and reach specific communities without needing to track a user across the internet, minimizing the impact of recent privacy changes. However, larger advertisers can still find attribution challenging.

Investment in AI and Machine Learning

In describing the strategies the company was adopting to grow user engagement in its S-1 filing, Reddit said it was applying machine learning to improve recommendations and make them more customizable to each user:

If the company is able to continue to leverage AI to improve its user experience, it will be able to take advantage of a major tailwind. In addition, its stated goal to start licensing user data to LLMs may open a significant new revenue stream for the company, allowing it to simultaneously benefit from the demand for AI while also investing new revenue into its product to better take advantage of AI advancements.

Managing Content Moderation

Like any large social platform, Reddit has its fair share of difficulties moderating the content on its platform. Other platforms like Facebook and Twitter have also encountered difficulties with this. For the most part, Reddit has relied on a decentralized network of community moderators to police traffic and user behavior. Chris Slowe, Reddit’s CTO, put it this way in June 2021:

Reddit has continued to receive criticism over its handling of different forms of hate speech and inappropriate content on the site. No social platform has solved the problem of balancing content moderation with freedom for their users. The market for managing digital content moderation is a multi-billion dollar market, but the problem is far from solved. Reddit will continue to be at risk of user backlash depending on how content continues to evolve on its platform. In its February 2024 S-1 filing, Reddit acknowledged this risk, stating that “our approach to content moderation inherently subjects us to numerous risks”.

Navigating “Reddiquette” for Advertisers

Reddit’s history as an open platform, self-managed and moderated by its community members, also leads to a much more complex set of social standards, referred to as “Reddiquette". For example, the Reddit wiki talks about self-promotion this way:

Reddit, as a platform, recognizes the informality with which most of its users treat the platform. For example, they’ve maintained Old Reddit to maintain connection with Reddit users who prefer an even more informal experience. However, advertising can be seen as more transactional on Reddit and be met with hostility – even more than it is on Twitter, Facebook, or Instagram. Reddit users tend to be privacy-conscious and suspicious of paid ads. Advertisers unfamiliar with the etiquette might find themselves mocked on Reddit. There are entire subreddits dedicated to making fun of ads that don’t appeal to the user base. A hostile reception might drive away key advertisers over time, as they opt for lower variance advertising channels.

Competition from Other Platforms

Source: eMarketer

As Reddit acknowledged in its S-1 filing, it faces a high degree of competition for both users and advertisers:

While Reddit is a social network of meaningful size, it lags larger platforms in terms of average engagement from its users. The leading platforms in terms of engagement in 2023 were TikTok and YouTube, both video-based platforms. As a result, most social platforms have started to emphasize video more, including Reddit. For example, Reddit's Discover feature, launched in February 2022, was built “with images and video top of mind". The more effectively Reddit can increase typical user engagement the more effective ad monetization will be.

Ad Blockers

Another significant risk factor for Reddit’s business, as the company itself acknowledges in its S-1 filing, is ad-blocking technology. Since Reddit’s business is almost exclusively reliant on advertising for its revenue, it is vulnerable both to the risk of more effective ad-blocking technology being developed and impacting the ability of its advertisers to drive results on Reddit’s platform.

Reddit’s co-founders first envisioned Reddit to be a social news platform, but what ultimately made the platform unique was the “community of communities” that developed. While other social media platforms emphasized individual identities, Reddit built a culture that valued content first. Reddit is often the first stop for many of its users to share advice, discuss news and ideas, and exchange information.

However, as Reddit sets its sights on bigger ambitions as a publicly traded company, tensions between the company agenda and community values may arise. Reddit’s key opportunities lie in expanding its products, international expansion, and stronger advertising monetization. It has a place among the most visited sites in the world and is creating value for hundreds of millions of users. Going forward, it will just be a question of how well it can capture that value.