From Virginia to Wall Street: Reddit's origin story

From Virginia to Wall Street: Reddit's origin story

With over one billion posts and 16+ billion comments, Reddit has 76 million daily active users, who spend an average of 16 minutes on the site per day. On average, about 1 million posts are added to Reddit each day. Reddit has a diverse user base across age groups, genders, and socio-economic backgrounds with more than 100K active communities (i.e. subreddits). The company generated $804 million at 76% gross margins by 2023. Reddit went public in March 2024, closing its first day of trading at a market cap of $9.5 billion. 

How Reddit started

Alexis Ohanian was a student at the University of Virginia doing a majors in History & Commerce, and working towards building a career in law. Things were going well until one day, in his junior year, Alexis got fed up with his LSAT practice test and went out to eat at Waffle House. There he had his “Waffle House Epiphany” - he wanted to make a difference in the world.

His friend Steve Huffman shared his sentiment. Steve was a computer science major and was constantly coming up with new product ideas. They joined hands deciding to build something meaningful. 

Steve came up with a nagging problem he was facing which he shared with Alexis. The idea was simple - enabling people to order food through a phone. They called it My Mobile Menu (MMM) and went about building that. 

During their senior year spring break, Paul Graham of YCombinator was coming to Harvard to speak. Steve wanted to go. Alexis had never heard of Paul but he joined Steve in the train ride up north to Cambridge, MA. 

Steve & Alexis were inspired by Paul's talk on how to start a startup (aren't we all?). Steve got his book signed & Alexis asked Paul out to dinner. 

At dinner, Steve & Alexis shared their app idea. Paul suggested they should apply to a new investment vehicle he was starting, Y Combinator. Both of them agreed. They prepped for the presentation and ended up taking another train up to Boston to pitch YC. They did the pitch expecting for the best but they got the news they didn't get in. They decided to go home & hopped on a train to Virginia the next day. 

While they were on the train, they got a call from Paul. He said if they got off the train & came back, Y Combinator would fund them. But there was a catch. They would have to ditch their mobile food ordering idea. They both agreed, got off at the next stop and headed right back. 

When the two got to Boston, Paul told them, “Don’t do mobile phones,” he said. Paul suggested they shift their focus to web apps instead. They realized that content created across the internet was fragmented and that the web needed a new front page. Which is when Paul said to them - "you guys need to build the front page of the internet."


Early traction & MVP

In 2005, Steve & Alexis moved to Cambridge after their graduation. Their preliminary vision for Reddit was simple - A community-led news website, with the popularity of the content decided by anonymous user upvotes & downvotes.

They were two weeks into building Reddit when Paul sent them an email asking why they hadn’t launched yet. A week later, Steve wrote back that the Reddit web app was up and running. On June 23, 2005, Reddit was live. The founders built the prototype and launched it within 20 days.

A few days later, Paul published his next essay where he explained his hypothesis that it cost less to start a startup than most thought. In this essay, he cited Reddit as an example. That got Reddit its first 1000 visitors. 

At the start, Alexis and Steve were the top posters themselves. They built fake accounts to give users the impression the site was bigger than it was. By August, they no longer had to do that because the site was growing on its own. 

There were no subreddits and no commenting. But they did have Karma points (Reddit’s gamification mechanism where users got points for submitting content) from the very beginning.

They began to get regular traffic from a tech oriented crowd especially early male adopters. Many influential bloggers and programmers began using the site to share interesting links and discuss topics related to technology and startups. This helped to establish Reddit as a hub for tech-related news and discussion.

A few months later, Aaron Swartz joined the Reddit team. A programmer by trade, Aaron helped the team ship more features, one of which was the comment feature. In October 2006, the subreddits feature was released, which turned out to be a gamechanger. r/science and r/programming became particularly popular. So did r/nsfw. 

In just 16 months, Reddit reached 1 million monthly active users (MAU) and 70,000 daily readers (DAU). 

In 2006, just weeks after the launch of Subreddits, Reddit got sold to Conde Nast for $10 million. CondĂ© Nast is a media company that owns a number of popular magazines, including Wired and The New Yorker. 

Post Acquisition & Conde Nast 

Post acquisition, Steve & Alexis stayed at the company for three years. In 2008, Reddit allowed anyone to create a subreddit instantly. This led to an explosion of new subreddits and traffic. 

Despite all this, they were still number two. Digg was winning the war for the front page of the internet with millions of unique monthly visitors while Reddit was below one million. In January 2009, Steve and Alexis left Reddit. 

In the same month, the Ask Me Anything (AMA) subreddit was created. It was an instant hit, with famous people participating regularly. The company also moved from physical servers to AWS and relaunched its mobile experience. 

The same year, Reddit launched sponsored content and a self-serve ads platform. In late 2009, Randall Munroe created the best comment algorithm for Reddit - this was a very important but often under-appreciated milestone in the evolution of Reddit. A big part of Reddit's appeal is that the top comments are often so great!

Reddit then turned to monetizing its platform. Its first move was to allow companies to advertise their brand. Companies could place ads on specific subreddits or target users based on their interests or behavior. Reddit’s advertising platform worked like an auction-based system (similar to Google), where companies bid for ad slots based on their budget & targeting options.

In 2010, it launched Reddit Gold, a premium subscription without ads. Reddit Premium gave users additional features like turning off ads, access to exclusive communities, ability to customize their avatar, and more. Reddit Premium members also received a monthly allowance of “coins,” which could be used to award other users for their content or comments. 

Reddit also allowed users to purchase virtual “gifts” and “awards” they could give to other users as a way of showing support for their content. 

Before 2010, Digg was the main competitor to Reddit. In August 2010, Digg launched its version 4 (Digg v4), and implemented a major site redesign. They introduced algorithm-driven content promotion & diminished the role of user voting. 

This upset many longtime users of Digg who migrated to other platforms like Reddit. The biggest factor that separated Reddit from almost all other social media platforms was anonymity. It wasn't about the person but about the content. Users couldn't see who they are talking to, how old they are, how much money they're making and so on. More importantly, users could subscribe to communities that aligned with their tastes & interests (unlike subscribing to people). 

The return of the prodigal sons 

In 2011, Reddit was spun out of Conde Nast as a separate entity with Yishan Wong as the new CEO. In 2012, President Barack Obama held an AMA on Reddit. This gave a big boost to Reddit which put them in front of a much older demographic than was typically on the site. The site grew more than 5x under the Yishan tenure. He left his role as CEO and was replaced by the VP of business development, Ellen Pao. 

At the same time, Alexis was brought back as full-time executive chairman. He was responsible for marketing, communications, strategy, and community. In July 2015, Ellen stepped down after a rather rocky tenure at the helm. 

Reddit needed a new leader and Steve Huffman returned as CEO. Steve focused heavily on monetization-related features. Steve relaunched Reddit Gold as Reddit Premium and optimized the site’s advertising platform. Throughout the 2016 US election, r/theDonald grew to be one of the most active subreddits on the site. 

These viral hits combined with an improved ad platform ended up generating $100M in annual revenue for Reddit in 2018. In 2019, Reddit surpassed social media peers Twitter, Pinterest, and Snapchat, reporting 430M monthly active visitors. From 2017/2018 and 2019 the user base grew from 330 million to 430 million. 

Few companies benefited more than Reddit during the pandemic. r/WallStreetBets became a raging sensation & helped spur the huge rally of stocks like Gamestop and AMC. Reddit also became THE place to discuss the cryptocurrency and NFT bubble. Reddit also launched its own crypto, tokenizing its community points.

In the wake of George Floyd’s murder in June 2020, Alexis stepped down from the board. Alexis urged the board of directors to replace him with a Black candidate, which was honored. In 2021, Reddits user base grew by 30% reaching roughly 780M monthly active users. 

How Reddit makes money 

Reddit's primary revenue source is advertising. In 2023, it accounted for 98% of the $804 million in revenue. The remaining 2% comes from Reddit premium subscriptions, as well as other products like Reddit Gold, avatars etc. 

Reddit Ads offers five main campaign styles: brand awareness and impressions, traffic, conversion, video views, and app installs. Reddit’s advertiser base is divided across large brands & SMBs. In 2020, Reddit introduced an automated ad marketplace to make it easier for self-serve advertisers to bid on Reddit’s ad space. 

Reddit supports personalized ads. In September 2023 Reddit announced that some users would no longer be able to opt out of personalized ads.

Advertisers using Reddit Ads are given access to a dedicated Reddit sales team, a full suite of tools, and best practices to navigate the platform. This service is reserved for companies with a quarterly spend of at least $50K. Advertisers bid using a cost-per-click (CPC) model where the highest bidding companies win better placement. 

The remaining 2% of Reddit revenue comes via premium subscriptions, as well as products like Reddit Gold, Avatars etc. Reddit gold is a premium subscription for users to use Reddit without ads. Reddit also allows users to purchase virtual “gifts” and “awards” they can give to other users a token of appreciation for their content. 

As of July 2023, Reddit began charging developers for access to its API. The company charges $12K for 50 million API requests. 

Reddit also started giving third parties like Google the ability to license access to search, analyze, and display historical and real-time data from the platform. Reddit is pursuing more deals that feed its data to large language models (LLMs). 

The moderators of Reddit 

Moderators are the bread and butter of Reddit. Each subreddit has moderators (or mods). They are users who volunteer to moderate content on a particular subreddit. Their job is to create the rules, and decide on the content/layout of the sub. They are responsible for removing spam and reposts, and generally steering the direction of the sub. 

Moderators are users who are active in the subreddit & have an interest in the topic since they are never going to be paid for it. Reddit moderators do nearly $3.4 million worth of unpaid work each year (equivalent to nearly 3% of Reddit’s revenue). 

Reddit developed an automated tool, known as the AutoModerator, that mods use to moderate content on their subreddits. 

The AutoModerator is a built-in, customizable bot that identifies, filters, and removes objectionable content. The bot algorithm operates based on mod-chosen parameters such as keywords, content with high number of reports, website links, etc. that are not permitted in a particular subreddit. 

The bot automatically removes objectionable content, which mods can review and reverse at any time. 

The moderators work closely with Reddit admins - the latter are paid employees who work for Reddit. The two often work together to troubleshoot site issues or come up with solutions to systemic problems. 

In 2022, Reddit launched a $1 million Community Fund where a range of community-nominated projects would receive dedicated support.

The road to IPO 

The company filed for an initial public offering at the end of 2021. In April 2021, Reddit began charging for access to its API. This was primarily aimed at big tech companies who were scraping Reddits valuable user data. 

The price hikes led some beloved third-party Reddit apps like Apollo & RIF to shut down. This caused an uproar across 100,000 + subreddit moderators, who relied on third-party apps to run their communities. Over 8,000 subreddits participated in a sitewide blackout from June 12 to June 14 to protest the changes. 

Reddit also started launching translation services within Reddit to bridge the language barrier in non-English speaking countries, which remained the largest source of Reddit traffic as of February 2024. Reddit also used machine learning algorithms to provide custom recommendations for each user. 

In February 2024, Reddit and Google announced a data licensing partnership worth $60 million per year. This is 8% of its 2023 revenue. One month later, on March 21, 2024, Reddit went public raising roughly $750 millions with a $9.5 billion valuation. 

Conclusion 

Reddit is not like your conventional social media platform. It definitely isn't as popular as Instagram or Tiktok or even X, but Reddit is substantially different from the rest. 

For a long time, it stayed stagnant, did not grow as fast as other social media companies, and struggled to monetize. The continuous change in leadership did not help their cause either. 

What Reddit has is its user data, which is very valuable and its loyal customer base who subscribe to a particular interest. Its demographic is extremely diverse even after 19 years. 

Add to that, its recent foray into licensing its data to tech companies, Reddit might just take off exponentially in the coming few years.