The last six months have felt like a perpetual threat — a looming doom that never quite transformed into something tangible. We have all been waiting for something to break — for us to enter a recession, for us to be fired, for our friends to be fired, for our relationships to collapse, for something to fall apart, because that has been the prevailing feeling. That things were brittle, and that if we were not vigilant, we would be swallowed whole.
What I believe we’re facing is more of a reckoning with many of the concepts and heroes of the past decade, and the consequences of over a decade of rot economics, where companies were rewarded and celebrated only for endless growth of revenue and headcount, and venture capital pumped billions of dollars into businesses that either shouldn’t exist or didn’t need to grow into vast empires.
The most notable of these is Reddit, one of the last social networks that didn’t feel utterly poisoned by the venture sect.
Reddit is an honest coterie of niche interests that had, to quote Alex Pareene, gone from “merely embarrassing but occasionally amusing, to actively harmful, to—mainly by accident—essential.” It was never a profitable enterprise, and never really resembled one. You’ll occasionally see an advertisement pop up for some sort of coding bootcamp, or a mobile game, but nothing about the experience naturally lends itself to making somebody money.
As I’ve hinted at before, social networks are generally useful tools but terrible businesses, with Facebook and Instagram only being capable of sustaining their massive profits by constantly fucking with their user experience to the point that Meta has to reassure people its products will still do the thing they’re meant to do.
However, in the pursuit of profits, Reddit has made a Musk-esque decision to start charging third-party apps to access Reddit’s API (which used to be effectively free), to the point that the most popular Reddit app (Apollo) would cost over $20 million a year to run, leading to the developer having to shut it down on June 30th.
As a side note, I wanted to Google Reddit’s old API policy. When I went to do so, every single result was an article about the API changes, and none of these articles discussed what the old API costs were. This is a direct result of search engines becoming a battle royale of publishers gaming the system for top results, rather than anything approaching a useful tool. It took me going on Twitter and asking my followers to actually get the answer.
For non-technical readers, an API is a service that allows different computer programs to interact with each other. An API call is when a program requests an action or information from the interface. In the context of Reddit, the could be something as simple as an upvote or downvote, or a request for all new threads or comments.
Reddit, out of a lack of adoption of its official Reddit app (and what can only be described as an intense and illogical greed), has decided that any app (with the exception of accessibility tools) that wants to interact with its APIs has to pay them 24 cents per 1000 calls. In Apollo’s case, this increases the cost of running the app to over $2 million a month. This led to Redditors protesting by taking thousands of major Subreddits private, effectively depriving the internet of massive sources of information and somehow crashing the site in the process.
The depressing response from Reddit CEO Steve Huffman was that there was no significant impact on revenue due to Subreddits closing, because like all rotten tech executives, Steve sees no value in Reddit beyond the revenue it generates. Charging for API calls is the classic dipshit growth-hound move — something that will allow you to show massive increases in revenue in an excel spreadsheet while you hock your unprofitable enterprise to the public markets.
In Huffman’s eyes — just like Elon Musk — apps should pay Reddit to give Reddit traffic and make Reddit more money, because said apps make a profit themselves. And much like Musk, Huffman clearly believes that the value of Reddit isn’t in the userbase or the content it creates, but in the platform that allows them to post on it. He doesn’t care that the userbase hates him, that his changes are deeply unpopular, and indeed, that very few people are likely to pay these prices . He only cares that he has another way to signify growth to investment bankers so that he can cash out.
Reddit has, to date, raised $1.3 billion in venture capital funding, almost all of which came after the company sold to Conde Nast for $10 million in 2006, before being spun off into its own independent enterprise in 2011. It would go on to raise $200 million in 2017 at a $1.8 billion valuation, with a ballooning headcount of 300 people. Between 2019 and 2021 it would raise a further $1.1 billion, growing to around 2000 people, always dancing with the concept of — but never quite reaching — profitability.
And much like Twitter, Reddit has remained valuable not because of any amount of venture investment, but because of millions of users that choose to post there for free. The process of trying to turn Reddit from a growth startup into a revenue-generating enterprise has, as with many companies, promises to undermine the basic value proposition of the site —namely, as one of the few reliable, searchable places to find answers to questions.
The problem is that Reddit has participated in a devil’s deal with venture capital — hundreds of millions of dollars that came with a promise to eventually create returns. “Growing” a company like Reddit is only possible by eroding the user experience. There is not much you can offer a Redditor that they will pay for (though they’ve tried!), and venture capital (much like public markets) is not interested in whether growing the company or mass-monetization makes the company better at the service it provides.
Raising capital — especially at the scale that Reddit has — always leads to the bill coming due. Every time that Reddit has had to raise money, it has had to express how it will grow its userbase, its headcount, and its revenue. Every time that Reddit has taken on hundreds of millions of dollars of equity funding, it has promised these investors that Reddit will, as a result of the cash injection, become bigger and more fiscally valuable, and each raise has been paired with more promises about how much more Reddit can be worth. And now Reddit has put itself in a corner, promising shadowy organizations like Tencent that their money was well-spent.
The problem is that Reddit has, for all intents and purposes, become all that it will ever be, and that’s not a bad thing at all. It is arguably one of the most useful parts of the modern internet, with niche communities that have become functional parts of micro-societies around the world.
But that doesn’t matter. Reddit may never be worth anywhere near as much as the valuations placed on it, and, thanks to investor demands, will eternally chase a way to justify a multi-billion dollar valuation that, in turn, can be dumped either onto the public markets or into the hands of an acquirer. Advertising is an unstable business model, and it’s going to be very, very difficult to find other ways to build one. The company is simply too large, too well-funded and too conspicuous at this point.
Where’s Your Ed At is a free newsletter, but if you like my work and want to kick me a few dollars, you can do so here. I really appreciate your support.
Reddit is symbolic of the larger reckoning that I see coming in tech, where flimsy business models begin to crumble, and the venture capital sect decides to punish the entire ecosystem for their own questionable strategies.
Insight Partners lowered its latest fund target from $20bn to $15bn, claiming they see a “great reset” in the tech industry while they sit on $10 billion that they’re not investing, while also slowing the pace at which they deploy capital. This situation is oftentimes framed as a result of cratering tech valuations (and the resulting lack of enthusiasm from the limited partners that fund VCs), but this was created by over a decade of recklessness by investors. Venture capital is the one that set these valuations, venture capital is the one that incentivized and propped up bad companies while letting others languish, and venture capital is the one that is refusing to invest as a result.
This is also being framed as a new problem, versus the natural result of over a decade of bad companies receiving ungodly amounts of money. Color raised $41 million for a niche social app in 2011 before shutting down a year later. Clinkle raised $25 million for their sound-based payments app in 2013, shutting down three years later because it never really had any kind of product to speak of, but not before creating the best/worst tech advert of all time. Theranos raised over $700 million for a non-existent product and its founder went to jail. WeWork raised over $20 billion, never turned a profit, and now has a market cap of less than $500 million — and yet its founder Adam Neumann was able to raise hundreds of millions of dollars for another company.
Blue Apron, a meal kit company) that never turned a profit (outside of the pandemic), raised $193 million of venture capital, went public at a $1.89 billion valuation in 2017, has had to raise over $200 million of post-IPO funds, and as of writing has a market cap of $41.5 million. Its CEO said last year that profit is “only a goal over the long term.” The Honest Company, an unprofitable home goods store with little or no differentiation other than being founded by Jessica Alba, raised over $500 million of venture capital and was able to IPO for $1.4 billion in 2021. Its current market cap is under $160 million.
Venture has been incentivized for years to create shambling “growth” companies that can be acquired by big firms that don’t think too much about what they’re buying, or dumped onto the public markets. The problem is that the markets themselves — as rotten as their incentives may be — have shown an intolerance for the lack of basic business acumen that most startups seem to have. An alarming amount of venture capital isn’t being invested to create good or sustainable or reliable or even public-ready companies, but obtuse stores of value that burn cash and lock up talented tech workers looking to vest their stocks.
The reckoning that’s coming is with the basic business model of the venture capital ecosystem. The public markets are no longer friendly to the piss-poor revenue models of the average startup, the SPAC craze is dead, and tech M&A has sputtered as a result. Venture itself can only make money on the funds it manages and the exits it creates, and creating exits used to be much, much easier.
The answer is much more painful, but requires venture capital to reconfigure — along with the larger startup ecosystem — into creating companies that are profit-generating from the very beginning, or are immediately classed as moonshots that have no expectation of “growth.” Venture capital can no longer simply assume that acquirers or the public markets will swallow whatever crap they’re trying to hock, as the rest of the world has become intimately aware (thanks in part to the egregiousness of cryptocurrency’s abuse of the average investor) that tech makes big, stupid promises that they never feel that they have to keep.
And if things don’t change — if venture doesn’t reconfigure toward developing and sustaining companies that can sustain and develop themselves — venture capital will begin to crumble. If a venture can’t repeatedly demonstrate an ability to liquidate investments, limited partners will stop giving them money to invest. If venture capital gets less capital to invest — or, as we’re seeing at the moment, they simply choose not to — startups will stop being formed, and the ecosystem will shrivel and begin to decompose.
This reckoning will be extremely painful for companies like Reddit that have become engorged with venture capital and the consequent demands of venture capitalists. Eventually venture will recognize — or perhaps they already have — that many investments they’ve made aren’t worthy of further investment, if they ever were before. And they’re going to have to stop funding companies that rely on venture to live.