According to secondary data, Reddit should go public for $5 billion.

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Reddit filed for an S-1 last week and plans to take the bold step of becoming its first venture-backed public offering in 2024. If successful, Reddit has the power to open the IPO window for other late-stage startups anxiously waiting in the market. Wings. But to have any chance of triggering a withdrawal trend, one thing needs to be right. That’s the valuation.

Investors who buy in an IPO want their investment to rise, and Reddit needs to price in a sweet spot where the stock is not undervalued and has room to rise. If Reddit’s price is too high to begin with, it could lose interest from potential buyers and fall from its IPO valuation instead of building momentum.

So what price should Reddit be targeting? Secondary investors told TechCrunch that if Reddit’s price is below $5 billion, it has a good chance of a successful IPO. He said that means some investors these days will receive pennies on the dollar if they make a profit. Their investment at all.

Reddit’s most recent preliminary round in 2021 raised $410 million at a $10 billion valuation from investors including Fidelity, Quiet Capital, and Montauk Ventures. The market has clearly changed since then, and it would be unwise to trade at that $10 billion valuation. Investors argue that $5 billion is the correct number for a variety of reasons.

that sweet spot

Javier Avalos, co-founder and CEO of Capilight, a secondary data tracking platform, said that based on the company’s $800 million in annual revenue reported in its S-1 filing, , said a realistic price would be to go for $5 billion. He added that the $5 billion valuation corresponds to a mid-single-digit revenue multiple, which is realistic for both today’s public markets and the trends in which other companies in the Reddit category trade.

“Valuations were significantly overvalued in the August 2021 round,” Avalos said. “As valuations fell further, pure earnings multiples rather than public fees started to become more attractive.”

Another key data point supporting the $5 billion valuation is secondary activity. Greg Martin, co-founder and managing director of Rainmaker Securities, said recent secondary deals he has seen value the startup between $4.8 billion and $5 billion. Caprite data showed interested investors bid for shares that valued the company at about $5 billion.

Investors who are buying secondary stock in a company this close to an IPO will only be buying at a valuation that is expected to rise when and after the company exits, so secondary data is very important here. It is beneficial for

what happens next

The $5 billion valuation that Reddit could pursue is not without risks. Despite the drop in valuation to $5 billion, there was no significant influx of secondary activity into the startup. Martin said this isn’t necessarily a bad thing, but it’s also not a good thing.

Reddit’s offering of stock to its top users is likely a ploy to keep the stock from entering the realm of meme trading, Martin said, adding that it currently has secondary investors in the company’s stock and He said he believes the lack of interest from crossover investors is a contributing factor to the company’s desire to get users excited. Early trading momentum.

“[Reddit] It is not actively traded. It’s just, um, people aren’t going in a very good direction,” Martin said. “The reason they’re going into the secondary market is because they want to get in before the IPO starts. They really have to believe there’s a chance of an IPO. I don’t think people are feeling that on Reddit.”

The reason Klaviyo and Instacart aren’t being viewed as big success stories or as catalysts for reopening the IPO window as many had hoped is likely due to the lack of expected hits on IPO day. John Abilette, a partner at StepStone, said Reddit should be more successful if it tries to avoid that strategy.

“Bankers and management teams are really trying to make sure that their valuations don’t reach a level where it becomes difficult for the company to maintain that valuation,” Avilette said. “To improve these metrics, we must consistently under-promise and over-deliver.”

There’s a reason Reddit is seeking a price tag of more than $5 billion, Martin said, but it may be trying to capture the “halo” effect of its new AI deal with Google. Or maybe it’s trying to bring liquidity to late-stage investors who aren’t likely to get anything for $5 billion. Investors hope that doesn’t happen.

Secondary investors say that if Reddit’s price is low, it has enough revenue and name recognition, and Martin says it has a real chance of pulling off an IPO because it hasn’t monetized its users enough. Agreed on that point. This will be good not only for Reddit, but also for the venture industry and secondary industry.

“If Reddit were to come out and price an IPO in a way that would do well on the first day, that would change the calculus for the entire population of IPO candidates.” [could] Hurry up and try to escape before summer arrives,” Avalos said.