In the summer of 2017, Reddit raised over $200 million at a $1.8 billion valuation. This was timely news for Reddit Inc's majority shareholder Advanced Publications, owner of Condé Nast Inc, which earlier that same year reported an 8.9% drop in subscriptions to its magazines. At that time, Reddit had 1.3 billion unique views per month, and 82 billion monthly page views.
Just six years prior, Reddit had been one of Condé Nast's properties. At a time when content platform valuations were sky high, Condé Nast bought Reddit in 2006 for under $20 million. Less than a month later, Google bought Youtube for $1.65 billion.
The acquisition was a savvy move by the publishing titan. As magazine readership steadily declined, Condé Nast was the epitome of the traditional media company under fire. Reddit provided Condé Nast with a new audience, a new medium, and a timely entry into the social media boom. Even more importantly, all content on Reddit is user-generated. The $1.8 billion valuation in 2017 was achieved with just 230 employees. What traditional media company can claim such lean operations?
But what about the other way around. What would Condé Nast do for Reddit? How could a traditional media company help Reddit grow from a startup to a formidable tech giant on par with Facebook and Twitter? What Condé Nast did in the years that followed provide and instructive case study on both the do's and don't's of platform acquisitions.
Early stumbles in acquisition management
Reddit's path to success was not a smooth trajectory. When the acquisition was announced, there were concerns that Condé Nast would pump its content throughout Reddit, essentially turning it into its personal online billboard. Fortunately, Condé Nast proved wiser than the doom prophets foretold and let Reddit be Reddit. Theirs was a philosophy of noninterference.
However, that noninterference went too far. In retrospect, it's clear that Condé Nast nearly starved the company to death. In 2010, former Reddit programmer Mike Schiraldi posted an announcement to Reddit's blog called "reddit needs help." The blog explained that the website, which drew over 280 million page views per month, had only four developers on staff. To explain why Condé Nast did not provide Reddit with more resources, Schiraldi wrote,
"...corporations aren't run like charities. They keep separate budgets for each business line, and usually allocate resources proportionate to revenue. And reddit's revenue isn't great."
Yet, Reddit's audience was growing faster than any other Condé Nast property, and its overhead costs were significantly lower because all content on the site was (and still is) user-generated - in other words, it was created for free.
What Condé Nast missed was the revenue-generating potential of Reddit. That same blog post asked for users to subscribe to Reddit Gold, a new subscription feature, at whatever price the user deemed fair. Speaking to Bloomberg, Schiraldi said, "We pulled in more revenue in a weekend than Condé Nast's sales team did all year for Reddit."
Course correction pays off big
In 2011, Condé Nast decided to spin off Reddit into its own company, Reddit Inc, which would be owned by Advanced Publications. By putting Reddit on its own two feet, the tech company was free to make its own decisions about resource allocations, funding, and strategy.
Reddit's growth quickly rebounded.
In 2014, just 2.5 years after being spun out, Reddit raised $50 million in its first funding round since it was founded in 2005, and at a $500 million valuation. As written above, in 2017 it was valued at $1.8 billion.
What Condé Nast and Advanced Publications got right
Not bad for an acquisition that cost Advanced Publications less than $20 million. Executives at Advanced Publications and Condé Nast Inc deserve credit for buying Reddit as early as they did--less than two years after the company was founded. The risk they took on a very young content platform demonstrates a forward-thinking strategy that should be replicated whenever possible.
Their instincts to leave Reddit alone were also on the right path, but perhaps applied over zealously. Within Condé Nast's structure, Reddit was still too young to compete for resources against the likes of The New Yorker and Vogue.
Reddit didn't generate more revenue than other Condé Nast properties, but its monthly page views were skyrocketing at a time when magazine readership was waning. For traditional companies looking to acquire a startup, measure your acquired startup's current growth and potential revenue, and invest in that.
Given Condé Nast's structure, it would have been difficult for the media company to focus resources on Reddit to give it the runway necessary to mature. Spinning out Reddit as its own company was the right call.
The lessons from Condé Nast experience can be boiled down to three steps:
Leave the core business alone!
Invest in the startup (i.e. provide runway)
There's a corollary to the second step of leaving the core business alone. Whenever possible, retain the founders and ensure that their work solely focuses on the startup's growth.
Condé Nast took a strange detour with the Reddit co-founders, and it's become a footnote to the early acquisition years that deserves a little more scrutiny. Reddit co-founders Alexis Ohanian and Steve Huffman were contracted to work for Conde Nast for three years after the acquisition. Part of their work included the design and launch of a Reddit-clone called lipstick.com, a celebrity gossip site. Perhaps unsurprisingly, lipstick.com did not work out (today, the domain redirects to Glamour's makeup column). As Huffman and Ohanian joked about in an episode of NPR's How I Built This, they were simply ill-suited for the task. Their hearts weren't in the soul of Lipstick.com the way it had been for Reddit. I wonder if things would have played out any differently had the cofounders been charged solely with growing Reddit.
Lipstick.com screenshot taken using the Internet Way Back Machine. Feb 2nd, 2007.
User-generated content is the future
According to a study by Crowdtap and Ipsos, millennials trust user-generated content (UGC) 50% more than any other media, find it 35% more memorable, and engage with UGC an average of 5 hours per day.
Thus it's no surprise that Reddit has been focused on growing the quantity, quality, and type of UGC on its platform. Reddit videos has also been growing exponentially over the past year. In October 2018, video views per month hit 1 billion. According to Digiday,
"In August, Reddit users posted or uploaded a total of 996,000 videos on the site, which is up 31 percent year over year. Reddit is now serving more than 400,000 hours of hosted videos per day and 13 million hours per month, up 38 percent since the beginning of 2018."
This growth is no accident. Since the 2017 fundraising, Reddit has gone on a hiring spree, growing from 230 in mid-2017 to 400 employees today. It has rolled out a new web design to improve user experience, and focused on improving ad revenue. Investments in the design also helped rebuild the backend of Reddit to make it more ad-friendly.
In terms of revenue, Reddit claims to have hit over $100 million in revenue for the first time in 2018. While this figure pales in comparison to Reddit's tech rivals, it's promising for the future.
But while Facebook and Twitter face the challenge of declining or slowing growth, Reddit remains a strong growth story. This year it surpassed Facebook as the #3 most popular website in the US.
The Future of Reddit?
Looking at the competition, Reddit has strong potential to continue to grow its revenue. Of particular interest is Twitter's $3.26 billion revenue. Twitter and Reddit boast similar numbers of active monthly users.
However, Reddit's value proposition to advertisers is different than Twitter's. While both platforms allow users to share content, both user-generated or traditional, Reddit's site structure looks more like a media company than Twitter.
Reddit, "the newspaper of the internet," organizes topics by subreddits, which is more akin to the topic sections of a very, very, very large newspaper. It's easier for users to find a topic of interest (as broad as 'funny' or as specific as 'stuff on cats') and spend more time diving deep into each subreddit, making it easier for advertisers to target their products.
With Reddit's renewed focus on creating a more ad-friendly and reader-friendly user experience, expect its revenue to start bridging the gap with the competition.
For traditional media companies, Reddit's success provides a template. Media companies hoping to compete with content platforms are better off sticking with the old adage "if you can't beat em, join em." Condé Nast did. And the rewards for successful platform innovation are substantial. If rumors of a Reddit IPO in 2020 are to be believed, the <$20 million bet on a baby-faced startup will have paid off many times over.
At a time when would-be competitors to the big platforms like Verizon are spending billions on acquisitions without much success, Reddit's journey stands out as a better and more effective path to success.