Reddit Inc. Closes $50 Million in Funding

You’ve heard of Facebook, and you’ve heard Twitter, but chances are you still don’t know very much about social media site reddit.

For long-time users — a.k.a. redditors — that may be a bit strange to hear. Reddit’s online community has been growing strong for nearly a decade now and is rightfully regarded by many as “the front page of the Internet.”

Despite the sovereign slogan, though, reddit is relatively small. Just 6% of online adults use reddit compared to 67% of online adults on Facebook, according to recent data from Pew Research Center.

To the uninitiated, reddit might come off as a small fry based on these figures. Take a closer look into reddit’s culture and community, though, and there’s a case to be made that the site holds more value than any other social media site — period.

What is Reddit?

At its core, reddit is an online message board where users can submit and curate content through a binary voting system. Content valued by the community gets up-voted, while content the community doesn’t value gets down-voted.

The more up-votes a piece of content gets, the more visible it becomes, and vice versa. Enough down-votes, and the content gets hidden. Enough up-votes, and the content rises to reddit’s front page, capturing the attention of millions.

Credit: reddit

Reddit goes beyond simple content curation, though. For every piece of content posted on reddit, there is a place for users to participate in related discussion.

Of course, most websites have this feature — it’s called a comment section (duh) — but reddit allows users to curate comments just as it does with content. Valuable comments are up-voted to the top, while the inane ramblings of 12-year-old children that plague sites like YouTube get buried in a barrage of down-votes.

This unique system of voting keeps reddit’s users accountable and boosts the overall quality of discussion. Redditors receive “karma points” for every up-vote and lose them when they’re acting like jerks.

It’s a common joke within the reddit community that these points are imaginary and don’t mean anything, but they actually just might have some monetary value in the near future (more on that below).

The key takeaway for those unfamiliar with reddit is this: the voting system has bred a community that is, in many respects, more thoughtful, involved, and harmonious than any other place on the Internet.

Credit: reddit

Double-Edged Sword

This unique culture has undoubtedly been a double-edged sword for those looking to monetize the site. Because reddit is so largely driven by the community, users tend to be both active and loyal. That’s both good and bad for the bottom line.

The plus side for advertisers is that reddit is one of the most addictive sites on the web. Individual users spend an average of 25 minutes on the site every day, beating Facebook by a nose and Twitter by a landslide.

Credit: Rescuetimeblog

The downside to this level of engagement for advertisers is that the community tends to be very involved and very self-aware.

Simply put, redditors don’t want to be made into a product, and they’ll raise hell if they feel like they’re being sold out. Any misguided attempts at monetization are enough to invite the wrath and scorn of reddit’s many dedicated users.

Some people are keen to stamp reddit users as a bunch of lazy millennials wasting their time on the web, but the truth is these individuals are generally well-educated, well-articulated, and browse the Internet with rusty pitchforks at their sides.

Facebook and Twitter can haphazardly tack ad impressions onto their sites and sell user data without too much backlash, but redditors are a completely different breed. The community has no qualms about putting reddit’s management on blast and won’t hesitate to take action to protect the site’s integrity.

Boiling the Frog

They say that if you put a frog into a pot of boiling water, it’ll jump out immediately.

But if you put a frog into a pot of warm water and gradually heat it up, it won’t notice the change in temperature until it’s too late.

To be honest, I have no idea if that actually works, but most of us have heard this adage before, and it’s certainly true that we’re much better at detecting sudden changes than gradual ones.

This is how you properly monetize a site like reddit, and it’s what I believe management has been doing for the past several years.

Corporate Backing

In 2006, Conde Nast, a division of Advance Publications, purchased $20 million in convertible preferred stock in reddit. As part of the deal, if reddit ever sold for less than $240 million, employees would get a smaller piece of the pie, and Advance would walk away with more.

In other words, reddit’s owners were aiming for — at the very least — a quarter-billion dollar valuation when the company was just getting started. They’d like to tell you it’s about building the community and not about making money, but it’s really about both.

Public Image

Once a clear proponent of free speech and expression, reddit has recently begun to purge the site of any questionable content in an effort to maintain a positive image with the media.

Part of reddit’s appeal is that users can freely create and subscribe to subsections, called subreddits. This allows users to customize their experiences on reddit and to filter the content they see.

Because these subs are user-created, several questionable ones had arisen throughout reddit’s history. Some of the more deplorable subreddits included r/jailbait, r/creepshots, r/beatingwomen, and r/niggers.

Needless to say, these subs became hubs for quasi-pedophilia, sexual harassment, bigotry, and racism. Initially, reddit’s owners let the subs stand in the name of free speech, but that position didn’t last very long.

In September 2011, Anderson Cooper dedicated an entire segment to r/jailbait and slammed reddit for hosting the questionable content. Soon after, the mainstream media began to latch onto more of these subs, and reddit began shutting them down in an effort to preserve its public image.

Share the Wealth

Just because redditors are sensitive to advertising doesn’t mean they’re completely against it. In fact, reddit’s owners have successfully spun advertising in a positive light in two ways.

In March, reddit announced a plan to donate one-tenth of its 2014 advertising revenue to charity. The reason for this was simple and comes straight from CEO Yishan Wong:

“We want to show that advertising doesn’t just support the reddit platform, it also directly supports the causes and goals of reddit as a whole.”

As of Tuesday, Wong decided to take this concept of sharing a step further. After closing a $50 million round of outside funding, reddit announced its plan to share 10% of that $50 million with reddit users themselves.

Exactly how the shares will be divided out has yet to be announced. Some are suggesting that users will receive currency in proportion to their karma points, but reddit has expressed hesitation because “karma can be gamed.”

At the very least, we know the deal will involve a Bitcoin-like crypto-currency that can be exchanged for a piece of the company.

“Nothing like this has ever been done before. Basically we have to nail down how to do each step correctly (it is technically, legally, and financially complex), though in our brief consultation with an ex-SEC lawyer, he stated he could find nothing illegal about this plan. Nevertheless, there are something like 30 different things we have to pull off to make this work, so we’re going to try,” Wong said.

The crux of all this is that reddit now has some venture capital behind it and is officially in profit-mode. No one’s talking about it just yet, but it’s entirely possible we’ll see a reddit IPO within the next five years.

Ultimately, users might get the feeling they’re being sold out, but at least they’ll be getting a piece of the pie. Can you think of a better way to keep the pitchforks at bay?

Until next time,

Jason Stutman

Check us out on YouTube!