How Reddit Plans To Become a ‘Real’ Business
“In every job interview I do, even with engineers, I get asked if this is going to become a real company.”
That’s Steve Huffman, the co-founder of popular social media site Reddit, who returned last July as CEO, after a series of high-profile missteps that led to a short-lived user revolt.
It’s not the sort of question usually asked of technology entrepreneurs, particularly not one whose company has been valued at $500 million by venture capitalists. But there is very little usual about Reddit, including the way that it is making money.
What, me monetize?
Reddit was formed in the summer of 2005 by Huffman and his University of Virginia roommate Alexis Ohanian, who both had moved to Massachusetts to participate in the inaugural class of Paul Graham’s Y Combinator, the well-known startup accelerator. It was immediately compared to Kevin Rose’s Digg in that both services effectively functioned as user-generated headline farms. But two big differences soon emerged.
The first was a late 2006 agreement to sell the company to magazine publisher Condé Nast (Vogue, The New Yorker, Vanity Fair), which initially gave the company runway without too much interference. The relationship would eventually sour, but not before Reddit introduced “subreddits,” or user-generated communities that ranged from the conventional (e.g., politics, funny) to the highly controversial (e.g., creepshots, jailbait). That decision is largely credited with helping Reddit triumph over Digg, which insisted on more curated content.
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Huffman and Ohanian quit when their Condé Nast contracts expired in late 2009. At the time, Reddit wasn’t really making much money. Condé Nast used it as a conversation starter with advertisers, but primarily as a gateway into conventional contracts for its established magazine brands like Wired. Not only did advertisers view some Reddit content as unsavory, but the site itself wasn’t terribly accommodating to advertisers in terms of available real estate. A premium membership called Reddit Gold was launched in 2010, and one year later Condé Nast spun out the company into an independent entity that could hire its own ad sales team.
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For the next several years, Reddit’s user growth continued to skyrocket—but its ad sales merely meandered. The site still didn’t offer much in the way of visibility for advertisers, and fewer brands wanted to be associated with the site after one of its subreddits played a central role in distributing hacked photos of nude celebrities in August 2014. Not too long after, Alexis Ohanian returned as executive chairman at the same time that then-CEO Yishan Wong resigned over an apparent dispute over office space (yes, that seems to really be what happened).
Ellen Pao, an existing Reddit executive who also was waging a high-profile gender discrimination case against her former employer (venture capital firm Kleiner Perkins Caufield & Byers) was installed as interim CEO. Her tenure wouldn’t last too long, but she did make a major hire: Zubair Jandali, a former Google advertising executive, as vice president of sales.
Jandali was given a fairly simple mandate: Figure out how to translate Reddit’s massive user base into dollars.
A new plan
Jandali immediately recognized that Reddit had made very little effort to help advertisers understand the site, resulting in poor experiences and high client churn rates.
“The reason brands spend money on advertising is because they want to affect word of mouth, and Reddit is basically the world’s largest water cooler,” Alexis Ohanian says, adding that one-third of all Americans will visit the site this month. “The brands are already being talked about on there, so it’s a question of if they want to be part of those conversations in an authentic and meaningful way.”
Jandali’s plan was to maintain traditional display advertising, but focus most of his efforts on creating what amounts to an in-house creative consultancy for native content. Reddit not only would provide space for brands, but would help develop their message for the right audience within (after first mining Reddit for information on how and where the brand is being discussed).
One notable success story was a campaign earlier this year for Coca-Cola (KO), which was looking to tease an upcoming Super Bowl ad that would have a Marvel (DIS) superhero tie-in.
“The Coke deal was a lot of fun,” Jandali recalls. “We worked with the innovation team at Coke and partnered with the agency that works specifically with that team. They gave us a brief, and we came back in with a strategy. The whole thing came together in about six days.”
Reddit’s idea was to ask users which Marvel superhero match-up would make the best Super Bowl commercial, with the most persuasive commenter to receive a free year of Reddit Gold. It was targeted to a variety of subreddits, including one titled Who Would Win? The post ultimately yielded more than 400 comments, with the average user spending a whopping 13 minutes in the comment thread. Moreover, around 28% of users who viewed the thread later returned to view the actual ad once it appeared.
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Another example was Reddit partnering with Google (GOOG) on a video series for the tech giant’s cloud platform. The campaign was called Formative, with Redditors asked to suggest entrepreneurs who should be interviewed about formative moments in their lives. In this way, Google effectively saw feedback before actually creating the ads.
Not only do such campaigns generate engagement for brands, but they also are largely impervious to ad-blocking software that has become popular among smartphone users (although Reddit Gold subscribers have the option to turn off all advertising, including native).
Reddit is not currently breaking out its creative consulting as its own paid product. “We want to over-invest in education with these clients, until Reddit becomes core to their marketing and strategic development competencies internally,” Jandali says, adding that 70% of Reddit advertisers now work with the company quarter after quarter. “That certainly wasn’t the case a year ago.”
‘Delighted’
After Ellen Pao resigned under murky circumstances last July, Reddit co-founder Steve Huffman returned to the company as CEO. It wasn’t something he had ever planned to do, but Huffman still loved the community and felt it needed immediate help. So immediate, in fact, that he began work just four days after making the decision.
“I was delighted to find, and had not expected to find, that Zubair’s sales team was the most stable, highest-performing team at the company,” Huffman says. “But they wanted us to give them more to sell.”
So Huffman got to work filling out the executive management and engineering teams, with an eye toward helping to improve the conditions for new sales. The result has been several product improvements—including the recent launch of native mobile apps and the a new blocking tool to minimize online harassment—plus getting current with auction and programmatic ad offerings. Coming soon, Reddit tells Fortune that it also will be able to offer keyword and interest targeting to advertisers.
Huffman says that revenue growth is one of his top three priorities, alongside employee engagement (measured via internal surveys) and increases in daily active users—all three of which, he believes, are interconnected.
One priority missing from that list, of course, is profitability.
“We’re actually not that far off [from profitability], but it’s not yet a top-line goal when you consider how small of a company we still are, with just 100 or so employees,” Huffman says. “Money is certainly freedom, which is what I tell people when they ask why we focus on money at all, but we still have a ton of cash left.”
That existing stash comes from a $50 million venture capital infusion in late 2014 at a $500 million post-money valuation led by Sam Altman, a Y Combinator “classmate” of the Reddit co-founders and the startup incubator’s current president. Other backers included Andreessen Horowitz, Sequoia Capital, PayPal co-founder Peter Thiel, actor Jared Leto, and rapper Snoop Dogg. Huffman suggests that another funding round could come within the next 12 months, but not during calendar 2016. He also doesn’t dismiss the possibility of an eventual IPO.
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“There is still so much low-hanging fruit on the advertising side, and I want to make sure that we plot through all of it so that we’ll be telling the strongest story possible when we speak again with investors,” Huffman explains.
Huffman declined to provide Fortune with specific revenue or revenue growth figures, except to say that the advertising take is now “a nice multiple” of where it was when he took over.
“When Steve and I came back, we did it for the chance, almost the moral responsibility, to let Reddit live up to its full potential,” says Alexis Ohanian. “To me, that means we have a user base of many, many people all using the platform to connect. But that doesn’t happen if we don’t also make this a sustainable business, which isn’t something we really had to focus on last time. And we’re finding ways to do that without compromising the things that made Reddit so great in the first place.”