Signal "Tech Winter" Will End

Now startups and venture capitalists will be more careful and rational so that winter is truly over.

ILHAM KHOIRI

Andreas Maryoto

The initial stock offering of social media platform Reddit gave rise to new excitement. In addition to the jump in share prices which reached 51 percent once they were offered to the stock exchange. Reddit also provides optimism about funding startup businesses. Startup business funding is now increasingly rational.

When Reddit offered its initial public offering on the New York Stock Exchange at a price of 34 US dollars per share, the price immediately surged. Reddit's shares briefly rose to 57.80 US dollars, but closed at 50.44 US dollars on its first day of trading. At market close, the San Francisco-based company's valuation matched analysts' estimates at 6.4 billion US dollars. They managed to raise 748 million US dollars in fresh funds.

Various media say, IPO Reddit is a rare optimism regarding the share offering of technology companies. The reason is, since some time ago the shares in this group have shown poor returns.

The story of Reddit's IPO is very interesting. You could say he is a victim of the technology company funding winter (tech winter). The current valuation is actually far below the 2021 valuation, namely 10 billion US dollars. The valuation at that time was mostly due to the euphoria of technology companies. They revalued it until the realistic value was around 6.4 billion US dollars.

Nevertheless, Reddit is considered to be one of the leading technology startups listed on the stock exchange after several companies went public, but it has not been successful since 2019. Instacart, valued at 10 billion US dollars in its initial public offering in 2021, also did not receive a good market response.

We may wonder, why is Reddit's valuation now below the 2021 valuation? We have to look back at the time when startup valuations were incredibly insane, multiplied after receiving funding from venture capital firms. One of the things that caused a stir was WeWork's startup valuation ahead of its IPO as it reached $48 billion in 2019. Investors didn't believe in that number, causing its value to plummet and the IPO to be canceled.

After that the funding company limited the disbursement of funds. Companies must start focusing on the path to profit. They can't burn money anymore. This is what is called the beginning of tech winter. Start-up businesses have collapsed and quite a few have laid off their employment.

REDDIT

Reddit Talk feature, a Clubhouse-like feature, on the Reddit social network. Reddit announced this feature on Wednesday (21/4/2021).

Also read: The Beautiful Story of Technology Companies Has Ended

Reddit's lower valuation is considered more realistic. This step was actually considered good and a perception of rationality began to emerge among technology companies and investors. The Financial Times said that this move to reduce valuations compared to before or "down round" did not receive ridicule in Silicon Valley. Rather, it is a signal that rationality is slowly returning to venture capitalists.

In fact, the "down round" step is recommended to be adopted, especially by start-up businesses that were born during that time due to inconsequential valuations. This method is recommended by Venky Ganesan, one of the partners at capital company Menlo Ventures, as a standard for start-up businesses that want to IPO but have historical burdens, namely having irrational valuations because they soared when investors were infatuated.

Reddit's IPO also makes technology companies more confident about entering the market. Analyst Sunniva Kolostyak on the Morning Star page wrote that a successful IPO could tempt other parties to invest in the market. Although in the case of Reddit, the market was hesitant and it was difficult to say whether the IPO would be successful and whether anyone would be interested? On the one hand, equity markets are at an all-time high, but on the other hand, investors are cautious about IPOs. He predicts that several start-up businesses will take off after Reddit's success.

Kompas

Infographic Research on the HIP Bill Controversy Content Analysis Related to the HIP Bill (Facebook, Twitter, Pinterest, Reddit)

Investor reasons

Reddit still experienced losses in its financial report. In terms of finance, the company's cash flow improved, but it has not yet generated annual profits. In the 2023 calendar year, the company reported a net loss of 90.8 million US dollars with a revenue of 804 million US dollars. This revenue figure jumped 21 percent from that of 2022. The company's gross margin reached 86 percent, up from 84 percent the previous year.

Most likely, many investors who bought Reddit stocks when they first started trading were active users of the company's platform. They realized the value that Reddit has been providing all this time. However, other investors may have only seen the company's growth prospects when they learned about their financial reports.

The Motley Fool website states that advertising is the main source of revenue for Reddit. The company believes that its platform offers a unique value proposition for advertisers with highly engaged users participating in a trustworthy and enthusiastic community. In a survey conducted by Reddit last year, 75 percent of users stated that they viewed the site as a trustworthy place to help make purchasing decisions for a product.

Reddit predicts that e-commerce will become another major driver of growth. Several markets have been launched in the online community, including Photoshop services. The company is moving forward with initiatives to promote more e-commerce services and is confident that it can monetize these efforts.

Reddit's most interesting attraction going forward is related to artificial intelligence (AI). The company's platform contains more than 1 billion posts with more than 16 billion comments. This figure ranks in the top 10 most visited internet sites in the United States. This abundance of content makes Reddit a leading source for AI training for large language models.

Especially in February, Google Alphabet's unit signed a $60 million deal with Reddit to use its site to train AI models and improve Google Search. Reddit also gained access to Google's AI models to enhance its platform's capabilities.

Looking at the development of Reddit, it is likely that the winter season of funding for technology startups will soon come to an end, although not like in the past where funding was very wild due to greedy valuations. Now, startups and venture capitalists will be more cautious and rational, so the winter season will truly come to an end.