Reddit raising venture financing? It would be crazy not to

The online community Reddit is said to be raising a round of venture financing that could value it at $400 million or more, according to a report at TechCrunch. Whether there is any truth to the rumor remains to be seen, but the idea that Reddit could be raising that kind of equity is hardly far-fetched. Not only does it have the kind of traffic and engagement levels that many media sites would jump at, with more than 37 billion pageviews in 2012, but building up its financial resources would allow the site to go head-to-head with some of the other players in the social-content space, including Tumblr and BuzzFeed. The only thing Reddit has to be wary of is ruining the community that made it successful in the first place.

If Reddit does manage to raise enough venture funding to give itself a half-billion-dollar valuation, it would mark an incredible reversal of fortune for the company. Not that long ago, Digg was the superstar online community, the one that drove massive amounts of traffic to any link that was shared on the network — the one whose cofounder appeared on the cover of Businessweek magazine behind the title “How this kid made $60 million in 18 months.” Reddit, by contrast, was a much smaller phenomenon, and was quietly acquired by the Condé Nast magazine empire in 2006. (Reddit was spun off as a separate entity in 2011, but Condé Nast retains control).

As Digg went through a number of redesigns that ultimately drove away many of its hardcore users, Reddit continued to grow steadily, thanks in large part to a hands-off approach by its parent — something Steve Newhouse (chairman of Advance Publications, which owns Condé Nast) described in a recent interview with the New York Times(s NYT). Reddit also became known for its community-driven innovations, including the “Ask Me Anything” feature. (Reddit general manager Erik Martin will be part of a panel on new-media entities, along with Jonah Peretti from BuzzFeed and Chris Mohney from Tumblr, at our paidContent Live conference in New York on April 17).

Can Reddit grow without suffering Digg’s fate?

Obama Reddit AMA

By the time Digg came apart last year and was sold off in pieces to the Washington Post and Betaworks (which has since re-engineered the service), Reddit was by far the dominant player. And the community — which added a CEO last year with the hiring of Yishan Wong, a former Facebook engineer — has continued to hit new heights over the past few months: it engineered an “Ask Me Anything” interview with Barack Obama, and traffic has continued to grow at a phenomenal rate. But the site is clearly looking for ways to improve its revenue as well — Wong announced a membership drive last year that was designed in part to avoid the need for more intrusive advertising.

As a number of observers have noted, much of the content that appears on BuzzFeed — and drives massive amounts of traffic to the site’s viral posts — originates at Reddit. That fact can’t have escaped the company’s attention (BuzzFeed is valued at about $200 million, based on its most recent financing round). So why not try to build on that by expanding the reach of the network and taking advantage of the user-generated content it produces, instead of letting others like BuzzFeed get all the benefit? Raising venture funding would give Reddit some funds to accomplish that, and give Condé Nast a payoff for the money it has invested in Reddit since the acquisition.

For Reddit, one of the big challenges of this approach is that trying to turn the community into more of a mainstream media entity risks damaging the somewhat anarchic personality that gives the network most of its unique character. In some cases, that personality veers into outright offensiveness — as it has with some of the “sub-Reddits” run by notorious Reddit troll Violentacrez. Wong has said that Reddit is committed to free speech even when it is offensive to some, but maintaining that commitment is going to be harder once VCs get their hooks into the company.

Digg suffered from a number of fatal flaws. One of them was embarking on a series of redesigns that appeared to be driven by financial motives rather than user demand. If Reddit can achieve a half-billion-dollar valuation and continue growing as a media entity without falling into that particular black hole, then its transformation into a social-media superstar will be complete.

Post and thumbnail images courtesy of Shutterstock/Africa Studio and Flickr user jphilipg