Reddit closes $50M financing round, valuing it at $500M — so will it have to grow up now?

Reddit, the online community known for its somewhat anarchic approach to content and behavior, has closed a $50-million Series B financing round that includes leading venture-capital firms Andreessen Horowitz and Sequoia Capital. And in an interesting move befitting the company’s overall approach, 10 percent of the shares issued in the financing round will be given to Reddit users. But the money will likely intensify the pressure on the site to moderate its freedom-loving ways.

The round is being led by Sam Altman, the CEO of Y Combinator, the startup incubator where co-founders Alexis Ohanian and Steve Huffman first launched Reddit in 2005 — and among the individual investors who are participating in the financing are two Y Combinator partners: founder Jessica Livingston and Gmail creator Paul Buchheit (Ohanian recently became a partner at Y Combinator).

Other individual investors in the round include early Facebook investor Peter Thiel, actor and singer Jared Leto, Eventbrite co-founders Kevin and Julia Hartz, Minted CEO Mariam Naficy and Reddit CEO Yishan Wong. Previous investors in an angel-only Series A last year included Ohanian, Reddit executive Ellen Pao, YouTube founder Jawed Karim, former Square COO Keith Rabois and Marc Andreessen.

Hiring staff, giving back to the community

Altman’s involvement in particular was highlighted by the company in the funding announcement because he was a member of the same Y Combinator batch of companies that Ohanian and Huffman were in when they started the site, and was among its first users. In a nod to Reddit’s most popular feature, the company said Altman would be doing an Ask Me Anything interview on the site on Tuesday after the news announcement.

paidContent Live 2013 Erik Martin Reddit

Erik Martin GM Reddit paidContent Live 2013 Albert Chau /

The funding gives Reddit more financial freedom than it has had in the past as a unit of Advance Publications, the parent company of the Conde Nast magazine family. Advance acquired the company in 2006 and spun it out three years ago as an independent entity, but retained control over its finances (and still owns more than half the shares, according to one report). The company’s blog post says the funding will allow it to expand in multiple areas:

We’re planning to use this money to hire more staff for product development, expand our community management team, build out better moderation and community tools, work more closely with third-party developers to expand our mobile offerings… improve our self-serve ad product, build out redditgifts marketplace [and] pay for our growing technical infrastructure.

In a somewhat unique move, Reddit also convinced all of the investors in the financing to give 10 percent of their shares to users, “in recognition of the central role the community plays in reddit’s ongoing success.” In a Reddit post about the fundraising, Wong said the site is thinking about creating its own crypto-currency that would be exchangeable for shares in the company. In another interesting twist, Altman also said he has given voting control over his shares to the company, as protection against “investors screwing it up.”

How does Reddit balance its goals?

As I tried to outline in a recent post, one of the most significant challenges for Reddit as it tries to justify the valuation it has been given is the tension between wanting to grow and reach a broader audience — and, most importantly, to reach advertisers who can help monetize the site — and the nature of the community itself. In other words, the difficulty of growing up without losing what made the site so successful in the first place.

Coincidentally enough, that tension was highlighted just as the rumors about the financing were being reported by Re/code and others, when Reddit played a key role in the dissemination of nude photos from the Apple iCloud accounts of celebrities such as actress Jennifer Lawrence and singer Ariana Grande.

A Reddit user set up a forum or sub-Reddit called The Fappening that was dedicated to the photos, until it was deleted by the site as a breach of Reddit’s rules (since the pictures were obtained illegally). That may have calmed the storm of outrage somewhat, but a number of users and critics pointed out that Reddit has hosted links to similar kinds of content — and has even defended doing so.

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Wong himself was also criticized fairly heavily for his response to the iCloud photo postings, a blog post in which he described Reddit as “the government of a new type of community.” One site described it instead as a “failed state.” So if Reddit is a government, what kind will it be? One that lays down the law, or one that accepts some chaos and bad behavior as the price of freedom?

Freedom of speech vs. monetization

One of the most powerful things about Reddit as a community is the freedom that it gives users, and especially the freedom to create forums on whatever topics someone happens to be interested in, including disturbing content like pictures of female corpses and links to bestiality. Users can simply appoint themselves as moderators, and are rarely disciplined in any way unless something extreme happens, like the incident in which a user known as Violentacrez was removed from forums devoted to pictures of women taken without their consent.

Ohanian has talked in the past about the importance of Reddit’s commitment to free speech, even uncomfortable kinds of speech, and its commitment to anonymity — a principle that led the Reddit co-founder to invest in Secret, a controversial app.

But how are those principles going to jibe with a $500-million-plus valuation, and the need to attract advertisers and large media brands, or the desire to become more of a journalistic entity by giving users tools such as the live-reporting feature Reddit launched earlier this year? Those are serious goals, and much of the content and behavior on the site is either in direct or indirect opposition to those goals.

In its blog post about the funding, Reddit said “May the reddits continue on its course to its destiny interrupted.” But what exactly is its destiny? That remains unclear — and if anything the financing has made it even less clear.

Post and thumbnail images courtesy of Flickr / Eva Blue