Reddit filed its S-1 last week and is set to take the bold step of becoming the first venture-backed public listing of 2024. If successful, Reddit has the power to open the IPO window for other startups who are in the last stage anxiously waiting behind the scenes. But for it to have any chance of sparking an exit trend, it needs to get one thing right: its valuation.
Investors buying into the IPO want upside for their investment, so Reddit needs to price itself in the sweet spot where the shares don’t look undervalued, but also have room for upside. If Reddit prices too high, it loses the interest of potential buyers and could pull back from its IPO valuation instead of building momentum.
So what price should Reddit be aiming for? Secondary investors told TechCrunch that Reddit could have a very good shot at a successful IPO if it is priced at $5 billion or less, even though that means some of its most recent investors will get pennies on the dollar if they perform. . their investment at all.
Reddit’s most recent seed round in 2021 raised $410 million at a $10 billion valuation from investors including Fidelity, Quiet Capital, and Montauk Ventures, among others. The market has obviously changed since then, and a $10 billion valuation wouldn’t be smart. Investors say $5 billion is the right number for several reasons.
That sweet spot
Javier Avalos, co-founder and CEO of Caplight, a secondary data tracking platform, said a $5 billion exit would be a realistic price based on the company’s $800 million in annual revenue, as reported in its S-1 filing . He added that a $5 billion valuation would equate to a mid-single-digit multiple of revenue, which is realistic for both today’s public market and what other companies in Reddit’s category tend to trade for.
“The valuation was way overpriced in the August 2021 round that they did,” Avalos said. “As the valuation moved lower and lower, it started to become more attractive than pure earnings multiples as opposed to public companies.”
The other critical data point that supports the $5 billion valuation is secondary activity. Greg Martin, co-founder and CEO of Rainmaker Securities, said recent spin-off deals he’s seen cost the startup between $4.8 billion and $5 billion. Caplight data showed interested investors bid for about $5 billion worth of the company’s stock.
The secondary data is very telling here, as investors buying secondary shares in a company this close to an IPO are only going to be entering at a valuation that they expect to rise during and after its exit.
What happens next?
The $5 billion valuation Reddit may be aiming for isn’t without risk. Even with the $5 billion valuation down, there hasn’t been a huge influx of secondary activity to the startup. Martin said that’s not necessarily a bad thing, but it’s not a good thing either.
Reddit offering stock to its top users is likely a ploy to avoid the stock entering meme trading territory, Martin said. He believes the lack of secondary and cross-investment interest in its stock today plays a factor in the company’s desire for its users to boost trading momentum early on.
“[Reddit] it’s not something that trades very aggressively. It’s kind of hum. people don’t see a ton of upside,” Martin said. “The reason they’re going into the secondary market is they want to get in before the IPO pop. You really have to believe there is an IPO pop. I don’t think people feel that way about Reddit.”
No expected pop on IPO day is likely because Klaviyo and Instacart are not seen as huge success stories or catalysts to reopen the IPO window as many had hoped. John Avirett, a partner at StepStone, said Reddit should see more success if it tries to avoid that strategy.
“The bankers and management are really trying to make sure that the valuation that they’re going out at is not at levels where the company is going to struggle to maintain those valuations,” Avirett said. “You have to consistently under-promise and over-deliver to drive those metrics.”
While there are reasons why Reddit might try to price above $5 billion, it may want to cling to the “halo” effect of the new AI deal with Google, Martin said. Or it could be trying to bring some liquidity to those late-stage investors who are in a position to get nothing if it falls to $5 billion. Investors hope it doesn’t.
Sub-investors agreed that if Reddit’s prices drop, it has enough revenue and enough name recognition — and, according to Martin, a low enough profit for its users — that it really has a good shot at a successful IPO. This would be good, not only for Reddit but also for the venture and secondary industries.
“If Reddit goes out and prices its IPO to sell, that is, prices it in a way that does well on day one, that changes the math on a whole pool of IPO candidates that [could] hurry out and try to get out before the summer months,” Avalos said.
