Reddit filed its S-1 last week and is ready to take the bold step of being the first venture capital-backed public listing of 2024. If successful, Reddit has the power to open the IPO window for other companies late-stage emerging companies eagerly waiting in the market. at. But to have any chance of triggering an exit trend, you need to get one thing right: your valuation.
Investors who buy into the IPO want returns on their investment, so Reddit has to set its price at the sweet spot where the stock doesn’t look undervalued but also has room to rise. If Reddit prices are too high from the start, you lose the interest of potential buyers and could reduce your IPO valuation instead of building momentum.
So what price should Reddit target? Secondary investors told TechCrunch that Reddit could have a good chance at a successful IPO if it is priced at $5 billion or less, although that means some of its newest investors will receive pennies on the dollar if they get any. return. your investment at all.
Reddit’s Most Recent Primary Round in 2021 raised $410 million at a $10 billion valuation from investors such as Fidelity, Quiet Capital and Montauk Ventures, among others. Obviously, the market has changed since then, and coming out at that $10 billion valuation wouldn’t be wise. Investors say $5 billion is the right number for several reasons.
that sweet spot
Javier Ávalos, co-founder and CEO of Capilight, a secondary data tracking platform, said going at $5 billion would be a realistic price based on the company’s $800 million annual revenue, as reported in his S-1 filing. He added that a $5 billion valuation would equate to a mid-single-digit revenue multiple. that is realistic both for the current public market and what other companies in Reddit’s category tend to trade.
“The valuation was very overvalued in the August 2021 round they did,” Ávalos said. “As the valuation got lower and lower, it started to become more attractive based on a pure revenue multiple rather than public comparisons.”
The other critical data point supporting the $5 billion valuation is the non-core business. Greg Martin, co-founder and CEO of Rainmaker Securities, said recent secondary deals he’s seen value the startup at between $4.8 billion and $5 billion. Caplight data showed that interested investors submitted bids for shares that value the company at about $5 billion.
Secondary data is very telling here, as investors who are buying secondary shares in a company so close to an IPO will only get a valuation that they expect to increase upon and after their exit.
What happens next?
The $5 billion valuation that Reddit could aim for is not without risk. Even with the valuation reduced to $5 billion, there hasn’t been a huge influx of secondary activity into the startup. Martin said this isn’t necessarily a bad thing, but it’s not a good thing either.
Reddit offering shares to its top users is likely a ploy to prevent the stock from entering meme trading territoryMartin said he believes the lack of interest from secondary and crossover investors in its stock today plays into the company’s desire for its users to get an early trading boost.
“[Reddit] It is not something that has been negotiated very aggressively; “It’s a little boring, people don’t see a lot of advantages,” Martin said. “The reason they enter the secondary market is that they want to enter before the IPO comes up. You really have to believe there is an IPO; “I don’t think people feel that way with Reddit.”
There is not likely to be an early pop on IPO day which is why Klaviyo and Instacart are not seen as big success stories or as catalysts for the reopening of the IPO window as many had expected. John Avirett, a partner at StepStone, said Reddit should be more successful if it tries to avoid that strategy.
“The bankers and management are really trying to make sure that the valuations that they make are not at levels where it is difficult for the company to maintain those valuations,” Avirett said. “You have to consistently under-promise and over-deliver to improve those metrics.”
While there are reasons why Reddit could try to set a price tag of more than $5 billion, it may be looking to take advantage of the “halo” effect of its new AI deal with Google, Martin said. Or it could be trying to provide some liquidity to those late-stage investors who probably won’t get anything if the investment goes to $5 billion. Investors hope not.
Secondary investors agreed that if Reddit’s prices are low, it has enough revenue and a fairly well-known name (and, according to Martin, its users are under-monetized enough) to have a good chance at a successful IPO. This would be a good thing not only for Reddit but also for the secondary and venture industries.
“If Reddit goes out and prices their IPO to sell, meaning they price it in a way that does well on day one, that changes the math on a whole cohort of IPO candidates that [could] run and try to get out before the summer months,” Ávalos said.