Reddit’s biggest risk factor is Google

Happy Friday. Aside from Google’s Gemini fiasco and Nvidia’s blowout earnings report, the big tech news this week was Reddit detailing plans for its long-awaited IPO. Below, I get into Reddit’s biggest risk factor, the company’s fascinating relationship with Sam Altman, and more…

The first thing I did upon opening Reddit’s IPO paperwork on Thursday was press Command + F on my keyboard and type “Google.”

Reddit’s reliance on Google is perhaps the single greatest risk factor facing its viability as an independent public company. But you’d be hard-pressed to find management’s acknowledgment of this uncomfortable fact in the hundreds of pages they published about the business this week.

The first and most important way Reddit relies on Google is for traffic. Around August of last year, I’m told that Reddit employees began noticing a sudden surge in users after a change to Google’s search algorithm. As Reddit’s IPO filing makes clear, user growth had essentially been flat at 5–7 percent per quarter since the beginning of 2021. But after Google’s changes took effect in the middle of 2023, Reddit’s daily users jumped dramatically, ending the year up 27 percent.

If Reddit can benefit so much from a Google ranking change, could its growth tank with another update? (Reddit declined to comment for this story, citing the quiet period it’s in ahead of the IPO.)

The Google gravy train continues, according to two people familiar with the matter. Internal metrics I’ve seen indicate that the first quarter of this year is going to be another blowout one for Reddit’s daily user growth. The number is already trending above the board’s projection with more than a month left in Q1. As was the case last quarter, most of this growth is coming from logged-out users, a signal the traffic is arriving through search.

Reddit said in its S-1 filing that the jump in user growth last quarter was due to “traction in our growth strategies, primarily from product enhancements and third-party search engine and algorithm changes.” Reddit did speed up the performance of its website, which helped Google’s ability to crawl it. But still, there’s no specific mention of the role Google’s mysterious algorithm played in the IPO documents.

If I were a professional investor or power user considering buying into Reddit’s IPO, I would want to know exactly how much of its traffic comes from Google. It’s not broken out in the S-1, and while I don’t have the exact numbers, my understanding is that the largest source of traffic is direct visits to Reddit itself followed by Google at a healthy double-digit percentage. No other source of traffic comes in above 1 percent.

While this isn’t the case anymore, Reddit used to internally bucket traffic into two categories: “direct” and “non-direct,” which meant Google. “We rely, in part, on internet search engines, such as Google, to generate traffic to our website, primarily through free or organic searches,” Reddit says in the risk factor section of its S-1. “Such as” is doing a lot of work there.

While Google certainly benefits from being able to show Reddit results, Reddit’s much greater reliance on Google for traffic raises important questions. And with Google increasingly leaning into generative AI, what happens when more people are consuming Reddit content through a large language model and not the traditional search engine? Is $60 million a year worth it?

That brings me to the second aspect of Reddit’s dependency on Google. Hours before its IPO paperwork was published, the world learned that Reddit recently made an agreement to sell its data for AI training to none other than… Google! So Reddit depends on Google for actual money now, too.

You won’t see this spelled out exactly in either company’s press release, of course. The firms making foundational AI models really don’t like talking about their training data, much less how much they pay for it. At least Reddit managed to squeak out in its S-1 that the contract is valued at $203 million over a period of up to three years, with $66.4 million being paid this year.

$66 million is not even one-eighth of what Reddit’s total revenue was last year, so it’s not like Google’s money is going to make or break the business. But it’s enough cash to suggest that Reddit’s future is becoming increasingly tied to Google’s, for better and for worse.

Another aspect of the Reddit IPO that fascinates me is that Sam Altman is the company’s third-largest shareholder. While CEO Steve Huffman technically controls more voting stock via proxy through the Newhouse family, Altman personally owns more than double Huffman’s number of super-voting shares.

How did this happen? Altman’s long history with Reddit is well known at this point, and he publicly led a $50 million investment round in 2014. What hasn’t been reported is that he was awarded more stock after helping Huffman come back as CEO in 2015. It was around this time that a little nonprofit startup called OpenAI began freely using Reddit data to train its models.

Without giving a reason why, Altman quietly left Reddit’s board in 2022 as ChatGPT was rising to prominence. Now, Reddit is trying to get more data licensing deals like its one with Google. Will OpenAI pay up or has that ship sailed?

My notes on what else is happening in tech right now:

Some interesting career moves I’ve noticed recently:

That’s it for this issue. I’m moderating a morning panel on investing in generative AI at the Upfront Summit here in LA next week. If you’ll be there, too, I’d love to say hi.

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